Sen. Elizabeth Warren, chairperson of the Senate Housing and Urban Affairs Subcommittee on Economic Policy, has recommended that the 12 Federal Reserve Bank regional presidents stop stock trading by them and their staff. Her letter followed reports that two regional presidents had made extensive stock trades.
Because of Warren’s letters, the Federal Reserve is planning on placing new restrictions on the financial activities of its policy makers.
Warren wrote, “The controversy over asset trading by high-level Fed personnel highlights why it is necessary to ban ownership and trading of individual stocks by senior officials who are supposed to serve the public interest.”
Warren focused in particular on the transgressions of Dallas Federal Reserve President Robert Kaplan and Boston President Eric Rosengren. In her letter to Kaplan, she wrote, “I am also asking that you impose strong and enforceable ethics and financial conflicts of interest rules for yourself and those that work for you.”
The Wall Street Journal reported the following: “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.”
Clearly, Kaplan showed bad judgment in making these investment decisions. Kaplan said in a statement, “His transactions complied with the Fed’s ethics rules, but to avoid even the appearance of any conflict of interest, I have decided to change my personal investment practices.”
Rosengren also executed trades in 2020 that in hindsight deserve criticism. Although Rosengren’s trades were smaller than Kaplan’s, he purchased a number of investments in real estate-related securities. In the past, Rosengren has warned about risks in the real estate market. Furthermore, real estate assets have appreciated substantially since April 2020 as a consequence of the Fed’s easy money policies. These include the buying of mortgages and imposing near zero interest rates on the Fed’s overnight lending.
Rosengren said in a statement that while he believed his trading squared with the bank’s rules, “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.” He hoped his stock sales would assure the public that he is operating without any conflict of interest between his personal life and his policy-making role.
Federal Reserve Chairman Jerome Powell ordered a “fresh and comprehensive look at the ethical rules around permissible financial holdings and activities by senior Fed officials.” Powell shared his reasoning, “because the trust of the American people is essential for the Federal Reserve to effectively carry out our important mission.”
Given the central role that the Federal Reserve plays in the American economy, it is critical that (1) any Fed official, including staff, put their assets in a blind trust and, (2) inform their money managers to purchase only passive investments.
It is well known that in the aggregate our central bank’s actions over the past 13 years have been bullish for stocks, bonds and real estate. By contrast, the Fed is expected at some point to raise interest rates and reduce their bond purchases to limit inflation to 2%. These activities could put a damper on both real estate prices and the stock market. We do not want any conflict of interest between the best interest of the nation and our Fed officials.
In my opinion, Kaplan and Rosengren should forgo any profit from their trading activities since assuming their current positions.
Originally published in the Sarasota Herald-Tribune
