Fed’s internal watchdog to review trades by top officials

The Federal Reserve’s internal watchdog will review financial trades conducted by high-ranking officials last year amid growing backlash to how top central bank policymakers managed their portfolios amid the pandemic.

The Office of Inspector General (OIG), the bank’s independent ethics investigator, is set to review whether investment moves made by Fed officials were in line with internal ethics rules and federal law.

“As part of our comprehensive review, we began discussions last week with the Office of Inspector General for the Federal Reserve Board (OIG) to initiate an independent review of whether trading activity by certain senior officials was in compliance with both the relevant ethics rules and the law. We welcome this review and will accept and take appropriate actions based on its findings,” a Fed spokesman said in a Monday statement.

The review was first reported by CNBC.

Federal departments and agencies have OIGs to serve as an independent internal check for fraud, abuse and unethical conduct. OIG investigations typically conclude with a series of recommended changes to internal policies that led to the conduct in question, and occasionally with referrals to federal law enforcement agencies.

The OIG review comes as the Fed faces growing backlash over trades made by three top officials as the bank was plotting and conducting an unprecedented attempt to stabilize financial markets amid the onset of the pandemic. Despite buckling earlier in the year, the stock market ended 2020 considerably higher than its pre-pandemic peak thanks in part to the Fed’s robust support for the economy and financial sector.

The Wall Street Journal reported last month that Robert Kaplan, president of the Federal Reserve Bank of Dallas, made several million dollars worth of stock trades in 2020. Subsequent reporting revealed that former Boston Fed President Eric Rosengren invested heavily in products tied to corporate real estate, a sector he repeatedly expressed concerns about in public remarks throughout 2020.

Both Rosengren and Kaplan announced their retirements soon after, with the former leaving office last week and the latter set to leave Oct. 8.

Bloomberg News also reported Saturday that Fed Vice Chair Richard Clarida traded between $1 million and $5 million out of a bond fund into a stock fund Feb. 26 of last year. Fed Chair Jerome Powell announced the next day that the bank could take action to support the economy if the emerging pandemic continued to weigh on the economy.

Fed officials said all of the trades conducted by top policymakers complied with internal rules and were cleared by ethics officials. But the portfolio management has raised serious questions and bipartisan concern about the strength of rules meant to keep top economic policymakers from enriching themselves with advance knowledge of their actions.

“Even if it appears to be the case that these trades were in compliance with existing rules, that just tells you the problem is the rules and the practices and the disclosure needs to be improved,” Powell said at a Senate hearing last week. 

Fed experts say the scandal could damage the bank’s credibility at a critical time for both the economy and the new approach to inflation cemented by Powell last summer. But Powell himself is facing growing danger as President Biden weighs whether to renominate the broadly popular Republican for another term leading the Fed.

Powell is largely aligned with Biden and Democrats on the need to keep up support for the economy through low interest rates until the job market is close to its full potential. Even so, a coalition of progressive Democrats and liberal activists are pressuring Biden to replace Powell over the Fed chief’s support for loosening some financial rules.

Progressive critics of Powell’s renomination have now seized on the trading scandal as a potential lapse of judgement and oversight. 

Sen. Elizabeth Warren (D-Mass.), who called Powell too “dangerous” to reappoint last week, asked the Securities and Exchange Commission on Monday to investigate whether Clarida, Rosengren and Kaplan violated insider trading laws. 

While Warren didn’t accuse Powell of any impropriety, she suggested in her letter that the Fed chief should have stopped the questionable trades of his colleagues.

“It is not clear why Chair Powell did not stop these activities, which corrode the trust and effectiveness of the Fed,” she wrote.