Fed Presidents Robert Kaplan and Eric Rosengren have committed to liquidating their portfolios (at a particularly auspicious time for stocks, which continued to smash through ATHs all summer long) in the wake of a market-shaking scandal caused by the release of senior Fed officials' financial disclosure forms, which revealed that Dallas Fed President Robert Kaplan made several million-dollar trades in 2020, while his fellow Fed officials (including Boston's Eric Rosengren) made smaller trades of their own. The financial revelations followed speculation about Fed Chairman Powell's portfolio late last month in research published by Dylan Grice.
But even Grice probably didn't expect the popular backlash elicited by news that senior Fed officials were playing the stock market, just like the unwashed Robinhood-loving masses, while their hands were on the money printer. On social media, users mocked the news as potentially damning for the central bank's credibility, since even the appearance of potential corruption is enough to destroy trust in a public institution, even if Powell & Co. continue to deny that their finances have now sway over policy. None of them have placed their money in blind trusts, which are considered the gold standard for dispelling conflicts of interest.
Cleraly sensing just how drastic this threat to the Fed's credbility has become, Fed Chairman Powell has Thursday directed board staff to take a fresh and comprehensive look at the ethics rules around permissible financial holdings and activities by senior Fed officials. A Fed spokesman also said the Fed has a set of supplemental rules that are stricter than those that apply to members of Congress and other agencies.
The announcement comes after Sen. Elizabeth Warren, who recently led the charge to jeopardize Powell's reappointment as Fed chair, challenged the Fed to impose a ban on the ownership and trading of individual stocks by senior officials.
After the stock trading debacles at the Dallas and Boston Federal Reserve banks, Sen. Warren writes to all 12 presidents: within 60 days, impose a ban on the ownership and trading of individual stocks by senior officials https://t.co/VtILTutTU1 pic.twitter.com/PavneO6v1z— Brian Cheung (@bcheungz) September 16, 2021
It's too early to say whether this "review" might lead to the censure, or ouster, of any senior Fed officials. But it's clear that Powell senses the threat to the Fed's independence that the trading revelations represent.
Unfortunately, at this point, it's a little like slamming the barn door after the horse has bolted.