Insider Trading at the Fed?
Over the last few weeks, serious ethics questions have been raised by revelations that top Federal Reserve officials held and traded assets of the same type that the central bank itself was buying, or that its policies may have significantly impacted. The news couldn’t come at a worse time: the Fed may have just compounded credibility issues when the public’s faith was already on thin ice.
The scandal erupted after recent financial disclosures, and the controversy mainly focused on ethically questionable trades made by Eric Rosengren and Robert Kaplan, presidents of the Fed branches in Boston and Dallas. As the Wall Street Journal reported: “A disclosure from Mr. Kaplan, who previously worked at Goldman Sachs Group, showed that he made multiple stock trades of more than $1 million each of the following companies: Apple, Alibaba, General Electric, Chevron and Amazon. In addition, he bought and sold other investments tied to interest rates and stock futures. Both are sensitive to changes in monetary policy.”
Rosengren’s trades were smaller but just as controversial. He bought positions in real estate-related securities, a sector that benefited massively from the Fed’s loose monetary policies and ultra-low interest rates. Both men resigned from their positions but provided assurances that their trading activities were in no way a violation of the central bank’s ethics rules.
A third Fed official also recently came under fire for his investments. As an investigation by CNBC revealed, Richmond Fed President Thomas Barkin “held $1.35 million to $3 million in individual corporate bonds purchased before 2020. They include bonds of Pepsi, Home Depot and Eli Lilly. The Fed last year opened a corporate bond-buying facility and purchased $46.5 billion of corporate bonds.”
The same investigation also implicated Fed Chair Powell himself. He held between $1.25 million and $2.5 million of municipal bonds and “while the bonds were purchased before 2019, they were held while the Fed last year bought more than $5 billion in muni’s”, a move that could have driven up the value of his position.
To those of us who understand the “revolving door” principle, the realities of crony capitalism, and true nature of the relationship between government and the corporate world, none of this is too surprising. If someone can be the vice chairman of Goldman Sachs one day and the president of a Fed branch the next, like Robert Kaplan, and that in itself doesn’t breach any ethics rules or violate any conflict-of-interest regulations, one can’t expect a few questionable trades to result in anything more than a brief moment of embarrassment.
However, what was interesting about this story is that it alerted the public to the lax rules that apply to central bankers and other officials.
So far, this scandal resulted in the resignation of two Federal Reserve chiefs and heightened scrutiny of the central bank's ethics rules. But even more importantly, it further shook public confidence and trust in the Fed, at a time when the net effect its inflationary policies is already being criticized as benefiting the “1%”, while penalizing savers and squeezing the budgets of ordinary households.