Thu. Jan 27th, 2022


When a trade scandal erupted for the first time at the Federal Reserve in September, prompting the resignation of two regional bank presidents, chairman Jay Powell vowed to tackle the controversy head-on.

“This is something we take very, very seriously,” he told a news conference that month. “This is an important moment for the Fed, and I am determined that we will rise to the moment and deal with it in ways that will stand the test of time.”

But four months later, the scandal flared up again, with the central bank’s second-in-command retire this week after new revelations about its trading activity. Richard Clarida’s departure has again raised thorny questions about the central bank’s response to one of the worst reputation crises in its history.

The Fed responded quickly in October with stricter rules to restrict trading activity by officials. But lawmakers, former staff members and ethics experts warned that the controversy would not go away without further action.

“For an institution that is proud of communication and proud of transparency, it’s a huge failure,” said Simon Johnson, a professor at the Massachusetts Institute of Technology who was a member of Joe Biden’s transition team working on the Fed and other regulatory focus. agencies.

“It makes it harder for people to stand by the Fed and insist that the Fed retain its independence.”

The scandal, which a independent investigation by the central bank’s government watchdog, was set on fire again last week after the emergence of amended disclosures by Clarida, the Fed’s outgoing Vice President, which was submitted in mid-December.

Clarida came under scrutiny in early October when it was found that he had moved between $ 1 million and $ 5 million from a bond fund to an equity fund in February. The transactions were made days before the central bank announced a large dose stimulus to support markets and the economy with the onset of the coronavirus pandemic.

But a previously unknown trade, which was left out by Clarida due to what he said were “unintentional errors”, showed that he had moved more than $ 1 million from the same equity fund just three days earlier.

In his resignation letter to President Joe Biden and a statement announcing his departure from the Fed, neither Clarida nor the central bank made any mention of the deal in question.

Clarida, now the third senior official to resign in the wake of the scandal, had to resign when his term expired on 31 January.

The Fed declined to comment on the nature of Clarida’s newly disclosed deal or how it relates to the earlier explanation that the first dubious trade was part of a “pre-planned rebalancing” of its portfolio.

At one point, the anger threatened Powell swallows after it came to light that the Fed chairman withdrew between $ 1 million and $ 5 million from a Vanguard equity fund in October 2020. At the time, the Fed said the sale, which was approved by government ethics officials, was made to cover family expenses.

Ethics experts said the inspector general’s investigation could limit what Clarida and the Fed could say, but the lack of transparency nonetheless raised concerns.

“The resignation was conspicuous without content. It’s a very loud silence, “said Norman Eisen, an ethics adviser to the Obama administration now at the Brookings Institution. “With each new development, the questions about what was going on only get deeper.”

“I do think the Fed has taken the right initial steps, but we now need some answers,” Eisen added.

In a December letter acknowledging the updated disclosures to the U.S. Office of Government Ethics, the Fed’s ethics officer wrote: “Based on my review of this amendment, I continue to believe that Mr. Clarida complies with applicable laws and regulations that conflict of interest control. “

Elizabeth Warren, the Massachusetts Democratic senator who called for an inquiry by the Securities and Exchange Commission, the central bank pressed again this week to hand over “all available information” about personal financial transactions that officials made before January 17th.

Dennis Lockhart, former president of the Atlanta Fed, said the new trade rules are an “admirable response to what is largely an optical problem”. But some Fed viewers have the fact that a final draft has not yet been released.

The Fed has said it will ban its policymakers and senior staff from buying individual stocks and other investments. It will also require 45 days notice before transactions are made in addition to the limits already in place that limit when transactions can be executed.

When asked about the details during his Senate confirmation hearing Powell said this week the guidelines are some of the “toughest in government” and will mean “there will be no ability to time the market”.

He added that the regulations would be put “threateningly” in place, but it was a “complex” process that required the Fed to “build” systems to implement them.

Walter Shaub, former director of the US Office of Government Ethics between 2013 and 2017, said: “The devils are in the details. . . The Fed’s response to this scandal was worrying because they did not show a strong commitment to transparency here.

He added: “What they need to do is build trust with increased transparency.”

Johnson and other ethics experts argued that the restrictions was not strong enough.

“The only way out of this is for the Fed to ban trade of any kind by all governors and other responsible officials at any time,” he said. “They have material non-public information all the time.”

Rigid rules are all the more important given the Fed’s centrality in financial markets, former staff members said.

“The Fed needs to have the strictest rules, because its leaders have access to the most important information you can use to make the most money in the fastest time,” said Gary Richardson, an economic historian at the University of California, Irvine. who previously worked at the Fed.

How the central bank works, both in its implementation of the rules and its handling of the investigation, will determine whether the scandal inflicts long-term reputational damage, said Kathleen Clark, a law ethics professor at Washington University in St. Louis.

“The public [must] has confidence that the people leading the Fed are not taking advantage of their positions to enrich themselves, ”she added.

Swamp notes

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