The Fed Under Fire

The Federal Reserve Board has long faced criticism for undermining the value of the U.S. currency by “printing” too many dollars, particularly through its pandemic-era policy of creating money each month that is infused into the banking system through purchases of $120 billion in government and mortgage-backed securities. Now the nation’s central bank is under fire for the financial transactions of some of its leaders that have raised conflict-of-interest questions. 

In the spotlight now is Federal Reserve Vice Chairman Richard Clarida who traded more than $1 million out of a bond fund and into stock funds in February of 2020, one day before Fed Chair Jerome Powell released a statement announcing possible monetary policy changes in response to the pandemic’s economic impact. Several days later, at an emergency policy meeting, the Fed cut interest rates by half a percentage point.

The trades were “a pre-planned rebalancing to his accounts,” according to a Fed spokesperson who added, “the transactions were executed prior to his involvement in deliberations on Federal Reserve actions to respond to the emergence of the coronavirus.”

The central bank said it will review its ethics rules and make changes as needed, following the revelation that two regional bank presidents engaged in trades that raised ethical questions. 

Robert Kaplan, President of the Dallas Fed, resigned on October 8, following the disclosure that he had traded in millions of dollars of stocks, stock market futures, and interest-rate-sensitive funds since he assumed the presidency of the Dallas regional bank in 2015. Boston Fed president Eric Rosengren recently resigned citing a health condition after the revelation he had traded in stocks and other investments tied to the real estate industry when he was helping to set the central bank’s monetary policy, which can have a huge impact on real estate.

The Fed forbids its officials from trading in bank stocks and during “blackout periods,” surrounding Fed policy meetings. Now it appears the Fed will adopt far more stringent restrictions in an effort to defend its credibility.