Fed ethics officials warned against trades

As the Covid-19 pandemic began, the Federal Reserve Board’s ethics advisers recommended officials limit personal investing activities.

In an email sent on March 23, 2020, ethics personnel urged Fed officials avoid “the appearance of acting on inside information” and “consider a trading blackout”. The Fed shared the text of the email with media.  

The email reminded officials that “[Federal Reserve] system policy provides” that “an employee with knowledge of Class I FOMC [Federal Open Market Committee] information should avoid engaging in any financial transaction the timing of which could create the appearance of acting on inside information concerning Federal Reserve deliberations and actions.”

The message went on: “In light of the rapidly developing nature of recent and likely upcoming system actions, please consider observing a trading blackout and avoid making unnecessary securities transactions for at least the next several months, or until FOMC and board policy actions return to their regularly scheduled timing. If you need to, for example, redeem a 529 account in order to pay tuition, or make other necessary transactions, please let me know in advance.”

The New York Times first reported the existence of the advice in an October 21 story. A Federal Reserve spokesperson made the “substantive” part of the email available to media. The spokesperson said the email was sent “to all FOMC [Federal Open Market Committee] participants”, as well as “some senior staff and to the ethics officers at the 12 reserve banks”.

In the email, sent on March 23, 2020, staff in the Fed’s general counsel’s office said any employee with knowledge of Class I FOMC information” should take care in their market activities. The Fed defines Class I information as “that includes policy-maker input”.

The members of the Federal Reserve Board of Governors and all 12 regional reserve bank presidents participate in FOMC meetings. However, only five of the latter vote.

The New York Times story arrived amid public controversy over Fed officials’ actions in making active trades in equities markets during 2020. Two regional Federal Reserve bank presidents resigned on September 27 after their trades were criticised.

On October 21, the Federal Reserve announced a new set of ethics rules “following a comprehensive review”. These ban Fed officials from holding individual equities and tighten restrictions on transactions.

Democratic senator Elizabeth Warren has requested a Securities and Exchange Commission inquiry into whether Fed officials’ market involvement constituted insider trading. When asked by Central Banking if the SEC had opened an inquiry into some of the officials named in press reports, the agency declined to comment.

In early October, the Federal Reserve inspector-general opened an investigation into “whether trading activity by certain senior officials was in compliance with both the relevant ethics rules and the law”.

Federal Reserve officials may own equities, so long as they are not in banks. However, the Fed’s emergency lending programmes affected the value of a very wide range of equities, arguably creating new potential for conflicts of interest.

The Federal Reserve began a quantitative easing programme in March 2020, which involved buying US Treasuries and mortgage-backed securities in secondary markets. Currently, the Fed purchases at least $80 billion in Treasuries and at least $40 billion in mortgage-backed securities every month.

The Fed opened several other emergency liquidity programmes in March 2020. These included support for corporate bond, commercial paper and municipal bond markets, as well as credit for money market funds.

Controversy over trades

Since early September, the trading activities of several officials have attracted media and public scrutiny. On September 27, the presidents of the Federal Reserve Banks of Boston and Dallas, Eric Rosengren and Robert Kaplan, resigned after their market activities became the subject of hostile media coverage.

Both officials stressed that their investment activities violated no rules. Rosengren stated he was resigning for health reasons.

As a US federal agency, the board of governors is subject to laws governing officials’ conflicts of interest and general asset disclosure rules. Regional reserve banks, however, are not federal agencies. Each has its own disclosure regulations and forms, and not all publish this data online.

Since Rosengren and Kaplan’s resignations, several media outlets examined asset-disclosure forms published by the members of the board of governors. The resulting reports provoked criticism of investment decisions made by Fed chair Jerome Powell and vice-chair Richard Clarida.

Rosengren carried out transactions in real-estate investment trusts. The value of these could closely connected to the Federal Reserve’s purchases of mortgage-backed securities. His 2020 asset disclosure form does not show any transactions for March or April 2020. All 68 of his individual transactions appear to be $50,000 or less.

On October 20, Reuters reported that the Boston Fed would not disclose documents relating to Rosengren’s investments and any ethics advice he received about them. The Boston Fed told Central Banking that it would not “publicly address specifics now, so as to see those reviews proceed fully, without prejudgment or distraction.”

Meanwhile, Kaplan acquired and sold large multiple $1 million-plus stakes in corporate stocks and exchange-traded funds. His corporate investments included several tech and energy stocks. The Dallas Fed asset disclosure form does not list transaction dates.

Powell sold several large equities positions in the last quarter of 2020, including a $1million–5 million stake in an index fund in October. Clarida transferred seven-figure sums from bonds to stocks in late February 2020, and made two further transactions in August.

Of the other members of the Board of Governors, Lael Brainard lists no equities transactions in 2020. Michelle Bowman lists a few purchases and sales related to retirement funds, and former vice-chair Randal Quarles lists a purchase and a sale in the $50,000–100,000 range.

Christopher Waller was not a member of the board of governors until December 2020. At the time the pandemic began, he was research director at the Federal Reserve Bank of St Louis.