US Federal Reserve opinions ethics guidelines after buying and selling revelations | Enterprise and Financial system Information
The Federal Reserve is reviewing the ethical guidelines that govern the financial assets and activities of its senior officials after it recently announced that two regional Fed presidents had done extensive business over the past year.
Robert Kaplan, president of the Dallas Federal Reserve Bank, traded millions in stocks in companies like Apple, Amazon and Google in 2020, while Eric Rosengren, president of the Boston Fed, traded stocks and real estate funds on financial disclosure forms. Both of them pledged to dispose of these holdings last week after being reported by the Wall Street Journal.
Comments from the regional presidents of the Fed can move the markets and influence the Fed’s interest rate policy. Such high-ranking officials often have exclusive access to discussions about impending policy changes that may benefit or harm some economic sectors, even though they are prohibited from trading in this knowledge and cannot act in the time leading up to the Fed meetings.
Both Kaplan and Rosengren said last week that their business is allowed under the Fed’s ethics rules. But they also said they would sell their holdings at the end of this month and put the money in index funds that track a wide range of stocks or in cash.
Still, the trades took place last year when the Fed took extraordinary steps to stimulate the US economy and stabilize financial markets during the pandemic. The central bank cut its short-term interest rate to zero in March 2020 and has since bought trillions of dollars in government and mortgage-backed bonds to keep longer-term rates low.
One effect of this policy has been to make stocks a more attractive investment compared to bonds, which offer very little returns when interest rates are low. The Fed has come under fire for worsening wealth inequality by increasing the value of equity portfolios.
The Fed’s purchase of mortgage-backed bonds issued by mortgage buyers like Fannie Mae and Freddie Mac has been criticized by several other regional bank presidents for contributing to the rise in home prices over the past year. Rosengren invested, among other things, in the real estate fund Annaly Capital Management, which also bought the same securities.
In a prepared statement Thursday, the Fed said Chairman Jerome Powell called for a “fresh and comprehensive look at the ethical rules on eligible financial participation and activities of senior Fed officials” late last week.
The statement came after Massachusetts Democrat Senator Elizabeth Warren sent letters to all 12 regional Fed banks on Wednesday urging them to ban high-ranking officials from owning stocks.
“The controversy over high-ranking Fed officials’ asset trading shows why there is a need to prohibit high-ranking officials from owning and trading individual stocks in the public interest,” Warren said in a letter.
Warren has passed laws that would prohibit the shareholdings of members of Congress, cabinet secretaries, and other high-ranking officials.
Under the complex structure of the Fed, the 12 regional banks are chartered as private organizations but are overseen by the Board of Governors of the Federal Reserve in Washington. The regional banks have their own codes of conduct, but these are largely in line with the rules of the Fed’s board of directors.
The Board of Governors follows the same rules for investment and trade as other government agencies, but follows additional rules “that are stricter than those that apply to Congress and other agencies,” the Fed said on Thursday.
For example, Fed officials cannot invest in banks, many of which are overseen by the Fed. They are also prohibited from doing business or holding a security for no less than 30 days for a period of approximately 10 days prior to each Fed meeting.
Kaplan worked at Goldman Sachs for 23 years before moving to Harvard Business School in 2006. He became President of the Dallas Fed in September 2015. The government disclosure forms allow officials to declare their holdings in ranges so the exact values are not available.
But by the end of 2020, Kaplan owned 24 different stocks and funds worth at least $ 1 million, including Apple, Chinese e-commerce company Alibaba, Boeing, Chevron, Facebook, and Johnson & Johnson. He also had a stake in the Kansas City Royals baseball team worth at least $ 1 million.
Rosengren began working as an economist in the research department of the Boston Fed in 1985 and has been president of real estate investment trusts since 2007.