2 senior Fed officials retire over business disclosures – NBC10 Philadelphia

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In a rare moment of ethical controversy for the Federal Reserve, two senior officials resigned on Monday following revelations about their financial transactions that revealed potential loopholes in the Fed’s investment rules.

Eric Rosengren, chairman of the Federal Reserve Bank of Boston, has announced he will step down this week for health reasons. Meanwhile, Robert Kaplan, chairman of the Dallas Fed, said he would step down on October 8 to avoid becoming a “distraction” from the Fed’s larger mission.

The two officials’ financial disclosures drew criticism from government watchdogs after revealing large stock transactions in 2020, when the Fed was spending billions of dollars to stabilize financial markets and stimulate the economy. As a result of their trade, the two officials could potentially have benefited from the Fed’s actions.

While Rosengren and Kaplan’s investments were permitted under Fed rules, they have at least raised the appearance of conflicts of interest, which Fed policy discourages. Senator Elizabeth Warren, a Democrat from Massachusetts, sharply criticized the deals and called for a ban on stock ownership by Fed officials.

Fed Chairman Jerome Powell will testify before the Senate Banking, Housing and Urban Affairs Committee, which includes Warren, on Tuesday, and will likely be asked about the Fed’s ethics rules. The resignations will give Powell a specific response he can point to, observers said.

“The departure of Rosengren and Kaplan should ease the pressure on Powell, who notably did not express his confidence in the two presidents” at a press conference last week, said Krishna Guha, analyst at the bank of Evercore ISI investment.

The presidents of the 12 regional banks attend the Fed’s private policy meetings, during which they discuss the central bank’s interest rate policies and are up to date with economic data not always available to the public. The decisions of the Fed can cause big fluctuations in the financial markets. The same goes for speeches by presidents and comments to the media.

Fed Chairman Jerome Powell said last week that the Fed would change its ethical policies following the disclosures. Still, the Fed may still face pressure to allow an external investigation to determine whether the two officials, or anyone else, traded on the basis of inside information about the Fed’s stock.

“After this blatant breach of public trust, only a full investigation and referral to the (Securities and Exchange Commission) is acceptable,” said Jeff Hauser, director of the Revolving Door Project, a nonprofit group that monitors government appointments.

Last year, Kaplan traded at least $ 1 million in 22 stocks and index funds, including Amazon, Chevron, Facebook, and Johnson & Johnson.

“The Federal Reserve is approaching a critical point in our economic recovery as it deliberates on the future direction of monetary policy,” Kaplan said in a written statement. “Unfortunately, the recent emphasis on my financial disclosure may become a distraction.” Kaplan announced he would resign on October 8.

Rosengren had invested in funds that held mortgage-backed bonds, the same type the Fed bought for hundreds of billions of dollars this year.

Rosengren said he became eligible for a kidney transplant last year and said the stress of working at the Fed during the pandemic recession worsened his health.

“It became clear that I should aim to reduce my stress so that I could focus on my health issues,” he said.

Rosengren and Kaplan weren’t voting members of the Fed’s policy-making committee this year, but they did contribute to the Fed’s interest rate policy forecast, which showed last week that the Fed was considering to raise its short-term rate, currently close to zero, by the end of 2022. This was a change from June, when the Fed’s projections showed no hikes until 2023.

Both are seen as relatively “hawkish” policymakers, which means they often favor higher interest rates to counter inflation.

Powell’s own financial information shows he owned municipal bonds in 2020, even though the Fed first started buying such bonds last year in an effort to stabilize that market. Powell, who was a private equity executive before being appointed to the Fed’s board of directors in 2012, said last week that he had owned munis for years and cleared its continuation with the Office of government ethics.

At last week’s press conference, Powell spoke about a reason these ethics issues flared up: Previously, municipal bonds were seen as a safe asset that Fed officials could own because the Fed did not. neither bought nor sold them. Yet last year he did, and he also started buying corporate bonds for the first time.

Boston Fed Senior Vice President Kenneth C. Montgomery will assume the role of Interim CEO. Dallas Fed first vice president Meredith Black will become interim president.

The presidents of the Fed’s regional banks are chosen by the six board members of each bank who are not bankers. Directors who are affiliated with banks are prohibited by law from participating.

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