Fed resignations don't blunt calls for broader ethics changes

BY Reuters | ECONOMIC | 09/27/21 07:02 PM EDT

By Howard Schneider

WASHINGTON (Reuters) - U.S. consumer and public interest groups on Monday kept up the pressure on Federal Reserve Chair Jerome Powell to impose stricter ethics rules on Fed officials, after two Fed bank presidents resigned because of controversial investing activity last year.

As Powell looks to be appointed to a second four-year term, "The Federal Reserve from Powell on down is desperate to end this scrutiny without looking into whether there should be legal repercussions," for Dallas Federal Reserve president Robert Kaplan and Boston Fed president Eric Rosengren, said Jeff Hauser, head of the progressive Revolving Door Project.

Hauser said Powell "should have made referrals" for investigations of Kaplan and Rosengren by the U.S. Securities and Exchange Commission and the Department of Justice.

"These figures shouldn't be able to resign and move into consulting and hedge funds or private equity in six months hence."

On Monday, Kaplan and Rosengren [L1N2QT0ZZ] announced their imminent resignations after disclosure of their active trading activity during 2020, when the Fed was moving aggressively to bolster the economy with steps that ultimately drove asset markets to record highs.

Fed critics have said the U.S. central bank needs stricter ethics standards, noting that both men have said their investing activity was approved by ethics officers and comported with rules against using the Fed's troves of market-moving information for personal gain.

The resignations are "grossly insufficient," said Dennis Kelleher, head of the Better Markets think tank on financial regulation. He called for Powell to make a "full disclosure of everyone at the Fed who traded during the pandemic while in possession of nonpublic information."

Fed officials are subject to the same ethics rules as members of Congress and other top government officials. They also are prohibited from trading during days around Federal Open Market Committee meetings, when the most sensitive information is distributed, and are not allowed to own financial sector stocks or mutual funds.

They also are subject to a broad command to avoid even the appearance of a conflict of interest. Their active investing during 2020, when tens of millions were unemployed, touched a sensitive nerve with the public, and they resigned less than three weeks after a Sept. 7 Wall Street Journal report on their investment activity.

Powell has opened a broad review of Fed ethics rules and at a press conference last week promised change. Asked if he had confidence in Kaplan and Rosengren he replied with a curt "no one is happy."

Kaplan said he resigned because his activity "risks becoming a distraction" to the Fed. Rosengren cited a worsening of a longstanding health issue that he hoped to better control with a lifestyle change. He was accepted onto the kidney transplant list in June, 2020.

White House officials had no comment on the Fed resignations. President Joe Biden is still mulling whether to appoint Powell to a second four year term when his current one expires in February.

Whether the issue affects Powell's chances may become clearer on Tuesday, when he appears before the Senate banking committee, which would have to confirm his nomination. Senator Elizabeth Warren, a Democrat on the committee who has frequently criticized Powell's financial oversight, also has called for tougher Fed ethics rules.

Investors have considered Powell's reappointment likely. Some of Biden's most progressive supporters say the Fed chief has set successful monetary policy for the pandemic, and Republicans have also endorsed him.

(Reporting by Howard Schneider; Additional reporting by Trevor Hunnicutt; Editing by David Gregorio)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

fir_news_article