Focus of Fed trading furor shifts to Powell’s activities
Scandal risks complicating reappointment of chair and leaving central bank rudderless
This week it emerged that Jay Powell withdrew between $1m and $5m from a Vanguard stock index fund in October 2020 © Financial Times
Jay Powell sought on Thursday to quash the trading scandal that has rippled through the US central bank in recent weeks by adopting a string of new restrictions on investments by the Federal Reserve’s top officials.
But Fed watchers said the furore has already hit too close to the central bank’s inner circle — including scrutiny of Powell’s own financial activities — to avoid a substantial blow to the institution’s standing. Worse still, the turmoil comes just weeks ahead a big policy shift and with the chair’s bid for a second term on the line.
“This was a black mark on the Fed and I’m sure they’ll recover from it, but it doesn’t help Jay,” said David Wessel, director of the Center on Fiscal and Monetary Policy at the Brookings Institution, a Washington think-tank.
When the scandal erupted in early September, it was squarely focused on large individual trades made by Eric Rosengren, then president of the Boston Fed, and Robert Kaplan, then president of the Dallas Fed, who have since stepped down, triggering Powell’s review of investment rules.
But in recent weeks, it became more damaging as it began to touch Fed board members more directly. First it emerged that Richard Clarida, the vice-chair, had shifted up to $5m from a bond fund to a stock fund in February 2020. A Fed spokesperson said this was a “pre-planned rebalancing move” approved by government ethics officers.
Then this week, the American Prospect, a left-leaning news site, reported that Powell’s financial disclosures showed the Fed chair withdrawing between $1m and $5m from a Vanguard stock index fund in October 2020. A Fed spokesperson said the sale, which was also approved by government ethics officers, was made by Powell to cover family expenses.
Eric Rosengren, ex-president of the Boston Fed, and former Dallas Fed president Robert Kaplan stepped down in the wake of the trading scandal © FT montage; Bloomberg
“I was really upset with what I saw from the Dallas and Boston Fed. They need to take these jobs seriously. These are public service jobs, not opportunities to game the system,” Sherrod Brown, the Ohio Democratic senator and chair of the Senate banking committee, said this week. “I don’t think Powell did any of that. But I think they’ve got to have specific rules and they’ve got to be enforced.”
A White House spokesperson said President Joe Biden continues to have “confidence” in Powell, whose four-year stint as the nation’s chief monetary policymaker expires in early February.
But Biden has yet to decide whether to reappoint Powell for another round in the post, a decision that has been made more complicated by the trading scandal.
“This illustrates the danger of waiting, the longer you let one of these things hang out, the more you let people think ‘oh well maybe there’s a chance I can get my candidate in and not Jay Powell’,” said Wessel.
Tim Duy of SGH Macro Advisors said in a note that there was a danger of a “possible leadership vacuum at the Fed” if the Biden administration did not make decisions quickly, both on Powell’s fate and other vacancies at the top of the central bank.
Randal Quarles’ tenure as Fed vice-chair for supervision, which is responsible for banking regulation, expired this month without a replacement and no one has been tapped for the job. Meanwhile, the Fed is gearing up to start shrinking the pace of its asset purchases to slow the support for the economy as high inflation persists. Next year the Fed will be debating when and how to actually start raising interest rates.
“The lack of White House attention to the Fed creates potentially enormous policy uncertainty,” Duy said.
The changes introduced by the Fed on Thursday to stamp out the trading furore may well be enough to satisfy some Democratic members of Congress that the central bank and Powell are taking the matter seriously enough to restore confidence in the institution. Not only is the Fed banning individual stock, bond and agency security trades, it is also requiring any transactions to be approved by ethics officers and instituting a trading blackout during times of financial market turmoil.
“These tough new rules raise the bar high in order to assure the public we serve that all of our senior officials maintain a single-minded focus on the public mission of the Federal Reserve,” Powell said.
The steps adopted represent a relatively big departure from the Fed’s traditional approach to trading activities, which gave officials some leeway, said Gary Richardson, an economic historian at the University of California at Irvine.
“The public pays the Fed’s leaders much less than they would make working in the private sector; in return, the public has let the Fed’s leaders actively manage their portfolios (maintaining their incomes) as long as their private and personal interests don’t impact public policy and don’t take direct advantage of the knowledge that they acquire in their positions,” he said.
But critics of the central bank who are trying to put pressure on Biden to replace Powell, say the moves announced on Thursday are still not enough, which means the cloud hanging over the Fed chair could linger.
“The new policies cannot be used to whitewash the prior bad judgment, failures of leadership, and violation of the Fed’s own policies,” said Dennis Kelleher, president of Better Markets, an advocacy group calling for tougher financial regulation.