WASHINGTON (BLOOMBERG) – The Federal Reserve will ban top officials from buying individual stocks and bonds, as well as limit active trading, after an embarrassing scandal that led two officials to resign and clouded chair Jerome Powell’s path to renomination.
“These tough new rules raise the bar high in order to assure the public we serve that all of our senior officials maintain a single-minded focus on the public mission of the Federal Reserve,” Mr Powell said in the statement on Thursday (Oct 21).
The Fed’s action marks its most significant response yet to recent revelations over trading last year by a few top policymakers as the central bank fought to protect the US economy from Covid-19.
While Mr Powell’s critics seized on the disclosures as ammunition to block his potential renomination by United States President Joe Biden and demanded an investigation, the chair had said little beyond assuring Americans that the rules would be thoroughly reviewed.
Senator Elizabeth Warren, among his most vocal opponents, has asked the Securities Exchange Commission (SEC) to look into whether any insider trading rules were breached. Critics also seized on Mr Powell’s own 2020 financial disclosure – showing he sold between US$1 million (S$1.3 million) and US$5 million in a broad-based stock index fund last October – to question keeping him at the helm of the central bank.
Mr Powell’s current term ends in February. Fed watchers said that if the ethics scandal was hurting Mr Powell’s chances for another four years, his prompt action to tighten the rules could tip the balance back in his favour.
“I don’t think there is anything that will satisfy Powell’s small but vocal group of critics – they will continue to use any argument they can find,” said Mr Roberto Perli, a former Fed economist and partner at Cornerstone Macro. “But regardless, Powell showed leadership and the ability to do the right thing quickly. So, if anything, I think this strengthens his candidacy. The Fed needs an independent chair.”
Under the new policies, senior Fed officials – including regional bank presidents, Washington governors and senior staff – will be limited to purchasing diversified investment vehicles such as mutual funds.
New appointees will have to divest certain assets before joining, like a portfolio of individual corporate bonds, for example, a Fed official said on a briefing call with reporters.
Other rules “to help guard against even the appearance of any conflict of interest in the timing of investment decisions” include providing 45 days’ advance notice for buying and selling securities, obtaining prior approval for such transactions, and holding investments for at least one year.
Additionally, “no purchases or sales will be allowed during periods of heightened financial market stress”, the Fed said.
“Today’s announcement is a start, but we can’t let up now,” Ohio Democrat Sherrod Brown, who chairs the Senate Banking Committee that oversees the Fed, said in a statement. “The American people need to be able to trust that the Federal Reserve works for them – that’s why strong reforms are needed now more than ever.”
The 12 regional Fed presidents will be required to publicly disclose financial transactions within 30 days, a policy that already applies to Washington-based governors and senior staff, the Fed said. They were previously only required to do so on an annual basis. Reports will be made public on the Fed’s website.
The announcement comes after Mr Powell last month ordered a systemwide review of ethics rules.
“At the pace that the government usually moves, this is breakneck speed,” said Associate Professor Peter Conti-Brown of University of Pennsylvania. “Those who have been critical of the Fed should recognise the Fed is holding itself to a much higher standard than any other part of the government, including Congress.”
The Fed chief has also asked the Fed inspector-general to take a look at the trading of “certain senior officials”.
Ms Warren, in her request to the SEC, singled out a Bloomberg News report on Oct 1 about Fed vice-chair Richard Clarida’s 2020 financial disclosures. His filings showed that he traded between US$1 million and US$5 million out of a bond fund into stock funds one day before Mr Powell issued a statement flagging possible policy action as the pandemic worsened.
Dallas Fed president Robert Kaplan and Boston’s Mr Eric Rosengren both stepped down following revelations of unusual trading during 2020. Mr Rosengren cited a chronic illness in announcing his early retirement.
The new rules will supplement those already in place, such as a 10-day trading blackout around Fed meetings, according to the Fed official on the call.