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 two heads of the 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.
At the direction of Fed Chairman Jerome Powell, the Federal Reserve Board 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 Wednesday, September 29, 2021):
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.
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 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.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.