A reputational crisis at the Federal Reserve has led to the resignation of two senior officials within the central bank, raising questions about the strength of the Fed’s guardrails around personal financial interests.
In September 2021, media reports highlighted several large financial transactions carried out by Dallas Fed President Robert Kaplan and Boston Fed President Eric Rosengren during 2020. As the heads of two of the Fed's network of 12 reserve banks, both were instrumental in engineering the Fed’s response to the financial fallout from the COVID-19 pandemic.
Rosengren and Kaplan would promise not to do any more trading during their tenure as senior Fed officials, but would later announce early retirements as the public fallout expanded.
Fed Vice Chairman Richard Clarida would also likely catch scrutiny for rotating millions of dollars out of bond fund and into stock funds in February 2020 — right before the Fed started slashing interest rates. In the wake of further revelations into the nature of those fund holdings, Clarida would step down two weeks earlier than planned.
At the direction of Fed Chairman Jerome Powell, the Federal Reserve Board (the system's headquarters in Washington) is now in the process of a system-wide review regarding its ethics practices. Questions have been raised as to why members of the policy-setting Federal Open Market Committee (FOMC), with immense power to move markets, would ever be allowed to personally profit on trades.
“No one is happy,” Powell told the press on Sept. 22. “No one on the FOMC is happy to be in this situation, to be having these questions raised. It's something we take very, very seriously.”
Peter Conti-Brown, a professor at the University of Pennsylvania who has written about Fed independence, told Yahoo Finance that the entire situation is a “calamity and a scandal” for the Fed.
“I think central bankers should never be under a cloud of suspicion that they’re advocating for policies that will enrich them,” Conti-Brown said, adding that he would support a wholesale ban on any senior Fed official holding any individual stocks.
San Francisco President Mary Daly, whose financial disclosures showed no individual stock holdings, told reporters Sept. 29 that she acknowledges the American public’s concern that the Fed’s existing ethics rules are “not sufficient.”
Here’s a timeline of all the events related to the central bank’s ethics debacle (as of Monday, January 10, 2022):
September 7, 2021: The Wall Street Journal reports that Kaplan made multiple stock trades in 2020, with several $1 million dollar-plus stakes taken in Apple, Delta Air Lines, Occidental Petroleum, and iShares Floating Rate Bond ETFs, among others.
September 8, 2021: Bloomberg reports that Rosengren made multiple purchases and sales in REITs and other securities in 2020, during which he was publicly warning of contagion in real estate markets. The Boston Fed said the trades were not done via a blind trust and were “consistent” with ethics rules.
September 9, 2021: Federal Reserve Banks of Boston and Dallas simultaneously issue statements with nearly identical language, both noting that their financial transactions complied with the Fed’s ethics rules. The statements said both presidents would dump their holdings by Sept. 30 (with reinvestment into diversified index funds or cash savings), alongside a promise that they would not be active in those accounts as long as they remained presidents.
Dallas Fed, Boston Fed heads issue similarly worded statements noting that their investments complied with the rules, but acknowledge "even the appearance of any conflict of interest"
Both will dump stock holdings by 9/30 and stop trading as long as they serve in those roles. pic.twitter.com/WtBeLf58VZ
— Brian Cheung (@bcheungz) September 9, 2021
September 15, 2021: Sen. Elizabeth Warren (D-Mass.) writes to all 12 Federal Reserve banks asking them to, within 60 days, impose a ban on the ownership and trading of individual stocks by senior officials.
September 16, 2021: Federal Reserve Board issues a statement via a spokesperson noting that Powell directed Board staff the week prior to “take a fresh and comprehensive look at the ethics rules around financial holdings and activities by senior Fed officials.” Fed notes that its rules on personal financial practices are “stricter than those that apply to Congress.”
September 22, 2021: Powell fields questions from the press, insisting he was not aware of the trading until after both presidents had filed disclosures (which are filed on an annual basis). Powell reiterates the Fed's existing restrictions, such as not being able to trade immediately before and during a policy-setting meeting. But the Fed chief admits “no one is happy” about the situation.
Powell said his personal financial interests includes ownership of municipal securities that he "froze" in 2019, holdings that he says were not traded during the Fed’s emergency measures in 2020.
September 27, 2021: Before the market open, Boston Fed President Eric Rosengren announces he will pull forward his retirement by nine months, citing the “worsening of a kidney condition.” Rosengren, who was originally scheduled to retire in June 2022, makes no mention of his REIT trades and says his last day will be September 30, 2021.
After the market close, Dallas Fed President Robert Kaplan says he will step down October 8, 2021, noting that his financial dealings risk "becoming a distraction to the Federal Reserve’s execution” of its monetary policy.
September 28, 2021: Powell answers questions from Congress, telling the Senate Banking Committee that the Fed is “also looking carefully at the trading that was done to make sure that it’s in compliance with our rules and the law."
A Securities and Exchange Commission spokesperson tells Yahoo Finance it "does not comment on the existence or nonexistence of a possible investigation."
September 30, 2021: Rosengren retires as Boston Fed President, with First Vice President Kenneth Montgomery stepping up to serve as interim president. A committee of Boston Fed board directors (not affiliated with regulated banks or financial institutions) will select a permanent replacement, who would need to be approved by the Fed Board.
October 1, 2021: Bloomberg reports that Fed Vice Chairman Richard Clarida traded between $1 million and $5 million out of a Pimco bond fund and into two stock funds. The shift happened on February 27, 2020, a day before Powell issued a rare, impromptu statement reiterating the Fed's support of the economy. The transactions were disclosed via a government ethics filing. A Fed spokesman says the transactions "represent a pre-planned rebalancing to his accounts."
Later in the day, Warren writes to the SEC asking them to investigate the extent, timing, and rationale of the trades "to determine if they may have violated insider trading laws."
A Fed spokesperson says in the afternoon that it began discussions the week prior with the central bank's Office of Inspector General to conduct an independent review of whether the trades were "in compliance with both the relevant ethics rules and the law."
October 8, 2021: Kaplan retires as Dallas Fed President, with First Vice President Meredith Black delaying her impending retirement to serve as interim president. A committee of Dallas Fed board directors (not affiliated with regulated banks or financial institutions) will select a permanent replacement, who would need to be approved by the Fed Board.
October 12, 2021: Clarida speaks at an Institute for International Finance event and indirectly addresses his 2020 transactions, saying: "I've always acquitted myself honorably and with integrity and respect to the obligations of public service."
Clarida was scheduled to be interviewed (by this reporter) at a Society for Advancing Business Editing and Writing event on Oct. 13, but the Fed informed SABEW a week prior that the appearance would be cancelled.
October 18, 2021: The American Prospect highlights a financial disclosure showing Powell selling shares from a Total Stock Market Index Fund in October 2020. Unlike the trades done by Rosengren and Kaplan, the fund is a broad market index (with exposure to all U.S. equities).
October 21, 2021: The New York Times reports that the Federal Reserve Board sent an email to senior Fed system officials in the early weeks of the pandemic warning them to avoid unnecessary trading for a few months.
Warren sends a letter to the Federal Reserve demanding the release of more details on any other ethics advice given to Fed officials.
Later in the day, Powell announces "tough new rules" that bar senior officials from actively trading and prohibits the purchase of any individual securities. The new rules effectively only allow purchases of diversified investment vehicles (like mutual funds), and cannot be done during times of "heightened financial market stress" like the spring of 2020.
October 22, 2021: The Senate Banking Committee's top Republican, Pat Toomey of Pennsylvania, issues a statement saying Powell should be "commended for effectively addressing this issue."
October 27, 2021: Four Democratic senators introduce a new bill that would tighten ethics rules, barring trading in any individual stocks (or commodity, virtual currency, or “comparable financial interest”). The rules are substantially similar to those already announced by the Fed on Oct. 21.
November 3, 2021: Powell tells reporters that he has briefed administration officials and members of Congress on the Fed’s ethics rules, adding that he is still soliciting feedback on making further changes. He declines to say if President Joe Biden was among those briefed.
January 6, 2022: The New York Times reports Clarida improperly detailed the nature of his stock fund holdings. An amended filing in December detailed that he had actually sold the same stock fund on Feb. 24 before buying them back three days later.
January 10, 2022: Warren sends a letter to Jerome Powell (a day before his renomination hearing), asking for more details on trades made by senior Fed officials.
Later in the afternoon, Clarida sends a letter to President Joe Biden announcing that he will be stepping down Jan. 14, instead of the Jan. 31 day that his term was originally set to expire.
This story was originally published on Sept. 30, 2021.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.