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    Fed Officials’ Trading Draws Outcry, and Fuels Calls for Accountability

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    Central bank regional presidents traded securities in markets in which Fed choices mattered in 2020. Here’s why critics find that troubling.Federal Reserve officials traded stocks and other securities in 2020, a year in which the central bank took emergency steps to prop up financial markets and prevent their collapse — raising questions about whether the Fed’s ethics standards have become too lax as its role has vastly expanded.The trades appeared to be legal and in compliance with Fed rules. Million-dollar stock transactions from the Dallas Fed president, Robert S. Kaplan, have drawn particular attention, but none took place when the central bank was most actively backstopping financial markets in late March and April.However, the mere possibility that Fed officials might be able to financially benefit from information they learn through their positions has prompted criticism of perceived shortcomings in the institution’s ethics rules, which were forged decades ago and are now struggling to keep up with the central bank’s 21st century function.“What we have now is an ethics system built on a very narrow conception of what a central bank is and should be,” said Peter Conti-Brown, a Fed historian at the University of Pennsylvania.On Thursday, Mr. Kaplan and Eric Rosengren, president of the Federal Reserve Bank of Boston, said they would sell all the individual stocks they own by Sept. 30 and move their financial holdings into passive investments.“While my financial transactions conducted during my years as Dallas Fed president have complied with the Federal Reserve’s ethics rules, to avoid even the appearance of any conflict of interest, I have decided to change my personal investment practices,” Mr. Kaplan said in a statement. He added that “there will be no trading in these accounts as long as I am serving as president of the Dallas Fed.”Mr. Rosengren, who had drawn criticism for trading in securities tied to real estate, also said he would divest his stock holdings and expressed regret about the perception of his transactions.“I made some personal investment decisions last year that were permissible under Fed ethics rules,” he said in a statement. “Regrettably, the appearance of such permissible personal investment decisions has generated some questions, so I have made the decision to divest these assets to underscore my commitment to Fed ethics guidelines. It is extremely important to me to avoid even the appearance of a conflict of interest, and I believe these steps will achieve that.”It was unclear on Thursday evening whether those moves would be enough to stop the groundswell of criticism as economists, academics and former employees asked why Fed officials are allowed to invest so broadly.The Fed has gone from serving as a lender of last resort mostly to banks to, at extreme moments in both 2008 and 2020, using its tools to rescue large swaths of the financial system. That includes propping up the market for short-term corporate debt during the Great Recession and backstopping long-term company debt and enabling loans to Main Street businesses during the 2020 pandemic crisis.That role has helped to make the Fed and its officials privy to information affecting every corner of finance.Yet central bankers can still actively buy and sell most stocks and some types of bonds, subject to some limitations. They have long been barred from owning and trading the securities of supervised banks, in a nod to the Fed’s pivotal role in bank oversight, but those clear-cut restrictions have not widened alongside the Fed’s influence.“Just as there is a set of rules for bank stocks, why not look to see if it is valuable to expand that to other assets that are directly affected by Fed policy?” said Roberto Perli at Cornerstone Macro, a former Fed Board employee himself. “There are plenty of people out there who think the Fed does nefarious things, and these headlines may contribute to that perception.”The 2020 batch of disclosures has received extra attention because the Fed spent last year unveiling never-before-attempted programs to save a broad array of financial markets from pandemic fallout. Regional Fed presidents like Mr. Kaplan did not vote on the backstops, but they were regularly consulted on their design.Critics said that raised the possibility — and risked creating the perception — that Fed presidents had access to information that could have benefited their personal trading.Mr. Kaplan made nearly two dozen stock trades of $1 million or more last year, a fact first reported by The Wall Street Journal. Those included transactions in companies whose stocks were affected by the pandemic — such as Johnson & Johnson and several oil and gas companies — and in firms whose bonds the Fed eventually bought in its broad-based program.None of those transactions took place between late March and May 1, a Fed official said, which would have curbed Mr. Kaplan’s ability to use information about the coming rescue programs to earn a profit.But the trades drew attention for other reasons. Mr. Conti-Brown pointed out that Mr. Kaplan was buying and selling oil company shares just as the Fed was debating what role it should play in regulating climate-related finance. And everything the Fed did in 2020 — like slashing rates to near zero and buying trillions in government-backed debt — affected the stock market, sending equity prices higher.“It’s really bad for the Fed, people are going to seize on it to say that the Fed is self-dealing,” said Sam Bell, a founder of Employ America, a group focused on economic policy. “Here’s a guy who influences monetary policy, and he’s making money for himself in the stock market.”Mr. Perli noted that Mr. Kaplan’s financial activity included trading in a corporate bond exchange-traded fund, which is effectively a bundle of company debt that trades like a stock. The Fed bought shares in that type of fund last year.Other key policymakers, including the New York Fed president, John C. Williams, reported much less financial activity in 2020, based on disclosures published or provided by their reserve banks. Mr. Williams told reporters on a call on Wednesday that he thought transparency measures around trading activity were critical.“If you’re asking should those policies be reviewed or changed, I think that’s a broader question that I don’t have a particular answer for right now,” Mr. Williams said.Washington-based board officials reported some financial activity, but it was more limited. Jerome H. Powell, the Fed chair, reported 41 recorded transactions made by him or on his or his family’s behalf in 2020, but those were typically in index funds and other relatively broad investment strategies. Randal K. Quarles, the Fed’s vice chair for supervision, recorded purchases and sales of Union Pacific stock last summer. Those stocks were assets of Mr. Quarles’s wife and he had no involvement in the transactions, a Fed spokesman said.The Fed system is made up of a seven-seat board in Washington and 12 regional reserve banks. Board members — called governors — are politically appointed and answer to Congress. Regional officials — called presidents — are appointed by their boards of directors and confirmed by the Federal Reserve Board, and they do not answer to the public directly. Regional branches are chartered as corporations, rather than set up as government entities.The most noteworthy 2020 transactions happened at the less-accountable regional banks, which could call attention to Fed governance, said Sarah Binder, a political scientist at George Washington University and the author of a book on the politics of the Fed.“It highlights the crazy, weird, Byzantine nature of the Fed,” Ms. Binder said. “It’s just almost impossible to keep the rules straight, the lines of accountability straight.”The board and the regional banks abide by generally similar ethics agreements. Employees are prohibited from using nonpublic information for gain. Officials cannot trade in the days around Fed meetings and face 30-day holding periods for many securities. Regional banks have their own ethics officers who regularly consult with ethics officials at the Fed’s Board, and presidents and governors alike disclose their financial activity annually.Even with Mr. Kaplan and Mr. Rosengren’s individual responses, pressure could grow for the Fed to adopt more stringent rules, recognizing the special role the central bank plays in markets. That could include requiring officials to invest in broad indexes. The Fed could also apply stricter limits to how much officials can change their investment portfolios while in office, or expand formal limitations to ban trading in a broader list of Fed-sensitive securities, legal experts and former Fed employees suggested in interviews.Fed-related financial activity has drawn other negative attention recently. Janet L. Yellen, the former central bank chair, faced criticism when financial documents filed as part of her nomination for Treasury secretary showed that she had received more than $7 million in bank and corporate speaking fees in 2019 and 2020, after leaving her top central bank role.The Federal Reserve Act limits governors’ abilities to go straight to bank payrolls if they leave before their terms lapse, but speaking fees from the finance industry are permitted.Defenders of the status quo sometimes argue that the Fed would struggle to attract top talent if it curbed how much current and former officials can participate in markets and the financial industry. They could face big tax bills if they had to turn financial holdings into cash upon starting central bank jobs. Because Fed officials tend to have financial backgrounds, banning financial sector work after they leave government could limit their options.But few if any argue that former officials would command such large speaking fees if they had never held central bank leadership positions. And it is widely accepted that the ability to trade while in office as a Fed president raises issues of perception.“People will ask, fairly or otherwise, about the extent to which his views about the balance sheet are interest rates are influenced by his personal investments in the stock market,” Ms. Binder said of Mr. Kaplan’s trades, speaking before his Thursday announcement. “That is not good for the Fed.” More

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    Fed Unity Cracks as Inflation Rises and Officials Debate Future

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    Federal Reserve officials are debating what to do as price risks loom, even as its leaders and the White House say today’s surge will most likely cool.Federal Reserve officials spoke with one voice throughout the pandemic downturn, promising that monetary policy would be set to full-stimulus mode until the crisis was well and truly behind America. Suddenly, they are less in sync.Central bankers are increasingly divided over how to think about and respond to emerging risks after months of rising asset values and faster-than-expected price increases. While their political counterparts in the White House have been more unified in maintaining that the recent jump in price gains will fade as the economy gets past a reopening burst, Washington as a whole is wrestling with how to approach policy at a moment of intense uncertainty.The Fed’s top officials, including Chair Jerome H. Powell, acknowledge that a lasting period of uncomfortably high inflation is a possibility. But they have said it is more likely that recent price increases, which have come as the economy reopens from its coronavirus slumber, will fade.Other officials, like James Bullard, president of the Federal Reserve Bank of St. Louis, have voiced more pointed concern that the pickup in prices might persist and have suggested that the Fed may need to slow its support for the economy more quickly as a result.Unwanted and persistent inflation seemed like a fringe possibility earlier this year, but it is becoming a central feature of economic policy debates as prices rise for used cars, airline tickets and restaurant meals. For the Fed, the risk that some of the current jump could last is helping to drive the discussion about how soon and how quickly officials should slow down their enormous government-backed bond-buying program — the first step in the central bank’s plan to reduce its emergency support for the economy.Fed officials have said for months that they want to achieve “substantial further progress” toward their goals of full employment and stable inflation before slowing the purchases, and they are just beginning to discuss a plan for that so-called taper. They are now wrestling with the reality that the nation is still missing 7.6 million jobs while the housing market is booming and prices have moved up faster than expected, prompting a range of views to surface in public and private.The bubbling debate reinforces that the central bank’s easy money policies won’t last forever, and sends a signal to markets that officials are closely attuned to inflationary pressures.“A pretty substantial part — or perhaps all — of the overshoot in inflation comes from categories that are directly affected by the reopening of the economy,” said Jerome Powell, the Fed chair.Al Drago/The New York Times“I see the debate and disagreement as the Fed at its best,” said Robert S. Kaplan, who is president of the Federal Reserve Bank of Dallas and is one of the people pushing for the Fed to soon begin to pull back support. “In a situation this complex and this dynamic, if I weren’t seeing debate and disagreement, and there were unanimity, it would make me nervous.”The central bank’s 18 policy officials roundly say that the economy’s path is extremely hard to predict as it reopens from a once-in-a-century pandemic. But how they think about inflation after a string of strong recent price reports — and how they feel the Fed should react — varies.Inflation has spiked because of statistical quirks, but also because consumer demand is outstripping supply as the economy reopens and families open their wallets for dinners out and long-delayed vacations. Bottlenecks that have held up computer chip production and home-building should eventually fade. Some prices that had previously shot up, like those for lumber, are already starting to moderate.But if the reopening weirdness lasts long enough, it could cause businesses and consumers to anticipate higher inflation permanently, and act accordingly. Should that happen, or if workers begin to negotiate higher wages to cover the pop in living costs, faster price gains could stick around.“A new risk is that inflation may surprise still further to the upside as the reopening process continues, beyond the level necessary to simply make up for past misses to the low side,” Mr. Bullard said in a presentation last week. The Fed aims for 2 percent inflation as an average goal over time, without specifying the time frame.Other Fed officials have said today’s price pressures are likely to ease with time, but have not sounded confident that they will entirely disappear.“These upward price pressures may ease as the bottlenecks are worked out, but it could take some time,” Michelle Bowman, one of the Fed’s Washington-based governors, said in a recent speech.The Fed’s top leadership has offered a less alarmed take on the price trajectory. Mr. Powell and John C. Williams, president of the Federal Reserve Bank of New York, have said it is possible that prices could stay higher, but they have also said there’s little evidence so far to suggest that they will.“A pretty substantial part — or perhaps all — of the overshoot in inflation comes from categories that are directly affected by the reopening of the economy,” Mr. Powell said during congressional testimony on June 22.Mr. Williams has said there is even a risk that inflation could slow. The one-off factors pushing up prices now, like a surge in car prices, could reverse once supply recovers, dragging down future price gains.“You could see inflation coming in lower than expected,” he said last week.Which take on inflation prevails — risk-focused, watchful, or less fretful — will have implications for the economy. Officials are beginning to talk about when and how to slow down their $120 billion in monthly bond-buying, which is split between $80 billion in Treasury securities and $40 billion in government-backed mortgage debt.The Fed has held a discussion about slowing bond-buying before, after the global financial crisis, but that came during the rebound from a deep but otherwise more standard downturn: Demand was weak and the labor market climbed slowly back. This time, conditions are much more volatile since the recession was an anomaly, driven by a pandemic instead of a financial or business shock.In the current setting, officials who are more worried about prices getting out of hand may feel more urgency to dial back their economic stimulus, which stokes demand.“This is a volatile environment; we’ve got upside inflation risk here,” Mr. Bullard said at a separate event last week. “Creating some optionality for the committee might be really useful here, and that will be part of the taper debate going forward.”Mr. Kaplan said he had been vocal about his preferences on when tapering should start during private Fed discussions, though publicly he will say only that he would prefer to start cutting policy support “sooner rather than later.”“I see the debate and disagreement as the Fed at its best,” said Robert S. Kaplan, a Fed official who is pushing to start easing support.Edgard Garrido/ReutersHe thinks moving more quickly to slow bond purchases would take a “risk management” approach to both price gains and asset market excess: reducing the chances of a bad outcome now, which might mean the Fed doesn’t have to raise interest rates as early down the road.Several officials, including Mr. Kaplan and Mr. Bullard, have said it might be wise for the Fed to slow its purchases of mortgage debt more rapidly than they slow bond-buying overall, concerned that the Fed’s buying might be contributing to a hot housing market.But even that conclusion isn’t uniform. Lael Brainard, a Fed governor, and Mary C. Daly, president of the Federal Reserve Bank of San Francisco, have suggested that the mortgage-backed purchases affect financial conditions as a whole — suggesting they may be less keen on cutting them back faster.The price outlook will also inform when the Fed first raises interest rates. The Fed has said that it wants to achieve 2 percent inflation on average over time and maximum employment before lifting borrowing costs away from rock bottom.Rate increases are not yet up for discussion, but Fed officials’ published forecasts show that the policy-setting committee is increasingly divided on when that liftoff will happen. While five expect rates to remain unchanged through late 2023, opinions are otherwise all over the place. Two officials see one increase by the end of that year, three see two, three see three and another three see four. Two think the Fed will have raised rates six times.Both Fed policy debates will affect financial markets. Bond-buying and low rates tend to pump up prices on houses, stocks and other assets, so the Fed’s pullback could cause them to cool off. And they matter for the economy: If the Fed removes support too late and inflation gets out of control, it could take a recession to rein it in again. If it removes its help prematurely, the slowdown in demand could leave output and the labor market weak.The Fed will be working against a changing backdrop as it tries to decide what full employment and stable prices mean in a post-pandemic world. More money from President Biden’s $1.9 trillion economic aid bill will soon begin to flow into the economy. For example, the Treasury Department in July will begin depositing direct monthly payments into the accounts of millions of parents who qualify for an expanded child tax credit.But expanded unemployment insurance benefits are ending in many states. That could leave consumers with less money and slow down demand if it takes would-be workers time to find new jobs.As the trends play out, White House officials will also be watching to see whether the economy is hot or not. The administration is trying to pass a follow-up fiscal package that would focus on longer-term investments, and Republican opposition has centered partly on inflation risks.For Mr. Kaplan at the Fed, the point is to be watchful. He said it was important to learn from the lessons of the post-2008 crisis recovery, when monetary policy support was removed before inflation had meaningfully accelerated — but also to understand that this rebound is unique.“Realizing that this is a different situation is a wise thing,” Mr. Kaplan said. More