Federal Reserve Chair Jerome Powell has ordered a sweeping review of the ethics rules governing financial holdings and dealings by senior ...
Federal Reserve Chair Jerome Powell has ordered a sweeping review of the ethics rules governing financial holdings and dealings by senior officials at the US central bank after two presidents sold millions in stock options last year.
Powell ordered the review late last week, the spokesperson said in an emailed statement, following recent reports that two of the Fed system's 12 regional reserve bank presidents had been active investors during 2020, a notably volatile year for asset prices as the country battled the COVID-19 pandemic.
Last year, Robert Kaplan, president of the Dallas Federal Reserve Bank traded millions of dollars in stock in companies such as Apple, Amazon, and Google.
Eric Rosengren, president of the Boston Fed, traded in stocks and real estate investment trusts, according to financial disclosure forms.
His holdings at the end of last year were much smaller than Kaplan's but include shares of Chevron, Pfizer, Phillips 66, and several real estate investment trusts.
Both pledged last week to divest those holdings after they were reported by The Wall Street Journal.
Last year, Robert Kaplan (pictured left in 2018), president of the Dallas Federal Reserve Bank traded millions of dollars in stock in companies such as Apple, Amazon, and Google. Eric Rosengren (seen right in 2019), president of the Boston Fed, traded in stocks and real estate investment trusts, according to financial disclosure forms
Federal Reserve Chair Jerome Powell has ordered a sweeping review of the ethics rules governing financial holdings and dealings by senior officials at the US central bank
Comments made by Fed regional presidents can move markets and they have a hand in the Fed's interest rate policies.
Such high-placed officials often have exclusive access to discussions about upcoming policy shifts that could benefit or be detrimental to some economic sectors, though they are prohibited from trading on that knowledge and are unable to trade in the period leading up to Fed meetings.
Both Kaplan and Rosengren said last week that their trades were permitted under the Fed's ethics rules, and there is no suggestion that either has broken the law.
But they also said they would sell their holdings the end of this month and place the money in index funds, which track a wide range of securities, or in cash.
Still, the trades occurred last year when the Fed took extraordinary steps to buoy the US economy and stabilize financial markets during the pandemic.
Those revelations, originally reported by The Wall Street Journal, prompted senior US lawmakers - including Senator Elizabeth Warren of Massachusetts - to demand more stringent restrictions on such activities.
'Because the trust of the American people is essential for the Federal Reserve to effectively carry out our important mission, Chair Powell late last week directed Board staff to take a fresh and comprehensive look at the ethics rules around permissible financial holdings and activities by senior Fed officials,' the statement said.
'The controversy over asset trading by high-level Fed personnel highlights why it is necessary to ban ownership and trading of individual stocks by senior officials who are supposed to serve the public interest,' Warren's letter said.
Warren has introduced legislation that would bar stock ownership by members of Congress, Cabinet Secretaries, and other high-ranking officials.
Senator Elizabeth Warren of Massachusetts (seen above on Capitol Hill on Tuesday) was one of several senior lawmakers who demanded more stringent restrictions on public officials holding stock options
The central bank cut its short-term benchmark interest rate to zero in March 2020 and has since purchased trillions of dollars in Treasury securities and mortgage-backed bonds to hold down longer-term interest rates.
One impact of those policies has been to make stocks a more attractive investment relative to bonds, which provide very little return when interest rates are low.
The Fed has come under criticism for worsening wealth inequality by pushing up the value of stock portfolios.
The Fed's purchase of mortgage-backed bonds, which are issued by mortgage buyers such as Fannie Mae and Freddie Mac, has been criticized by some other regional bank presidents for contributing to the run-up in home prices in the past year.
One investment that Rosengren made was in real estate investment trust Annaly Capital Management, which also purchased those same securities.
Under the Fed's complex structure, the 12 regional banks are chartered as private organizations but are overseen by the Federal Reserve´s board in Washington, known as the Board of Governors.
The regional banks have their own codes of conduct, though they are largely identical to the rules that govern the Fed's board.
The Board of Governors follows the same rules on investing and trading as other government agencies, but also follows additional rules 'that are stricter than those that apply to Congress and other agencies,' the Fed said Thursday.
Fed officials, for example, cannot invest in banks, many of which are supervised by the Fed.
They are also prohibited from making trades during a roughly 10-day period before each Fed meeting, and are not supposed to hold a security for less than 30 days.
Kaplan worked for 23 years at Goldman Sachs before joining Harvard Business School in 2006.
He then became president of the Dallas Fed in September 2015.
The government's disclosure forms allow officials to provide their holdings in ranges, so the precise values aren't available.
But at the end of 2020, Kaplan owned at least $1million worth of 24 different stocks and funds, including Apple, Chinese ecommerce firm Alibaba, Boeing, Chevron, Facebook, and Johnson & Johnson.
He also owned a stake in the Kansas City Royals baseball team worth at least $1 million.
Rosengren started working at the Boston Fed as an economist in the research department in 1985, and has been president since 2007.
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