A Critical Review of Federal Reserve Officials’ Market Trading

A Critical Review of Federal Reserve Officials’ Market Trading

A recent watchdog review conducted by the Federal Reserve’s Office of Inspector General has examined the market trading activities of two former high-ranking officials: Robert Kaplan of Dallas and Eric Rosengren of Boston. While the report does not accuse either of illegal behavior, it raises concerns about their actions and their potential impact on impartiality and the proper conduct of central bank officials.

The review highlights that both Kaplan and Rosengren engaged in market trading while simultaneously considering important policy matters during the early days of the Covid pandemic in 2020. This revelation sparked criticism and questions regarding the impartiality of the Federal Reserve Chair Jerome Powell, Governor Richard Clarida, and Atlanta Fed President Raphael Bostic. The actions of Kaplan and Rosengren, though not deemed illegal, were deemed to have created conflicts of interest and raised doubts about the impartiality of central bank officials.

Former Dallas Fed President Robert Kaplan, who retired early, faced scrutiny for his substantial trading in stocks, options, and other securities. While Kaplan asserted that his actions were compliant with the standards in place at the time, the report calls into question his lack of disclosure of specific information regarding the selling of stock option contracts. The report suggests that this lack of transparency undermined public confidence in the impartiality and integrity of the policymakers and senior staff during a critical period when the Federal Reserve was implementing monetary policy actions to address the economic effects of the pandemic.

Issues with Eric Rosengren

Former Boston Fed President Eric Rosengren, who stepped down for medical reasons, was faulted in the report for failing to disclose multiple trades on his 2020 ethics forms. The report also highlighted “multiple discrepancies” in brokerage statements and trading data in relation to his trades involving real estate investment trusts, which occurred while the Fed was purchasing mortgage-backed securities. These actions created an appearance of a conflict of interest, potentially raising concerns about Rosengren’s impartiality under the Federal Reserve Bank of Boston’s code of conduct.

Response and Reforms

Both Kaplan and Rosengren have been contacted for comment, but no response has been received thus far. In response to the controversy surrounding these market trading activities, the Federal Reserve has implemented stricter rules that prohibit officials from owning stocks, bonds, and cryptocurrencies. These new rules aim to rebuild public confidence in the impartiality and integrity of the Federal Open Market Committee’s work by eliminating even the appearance of any conflict of interest. The Fed’s decision to overhaul its trading rules was announced in February 2022.

The watchdog review of market trading activities by former Federal Reserve officials Robert Kaplan and Eric Rosengren has shed light on potential conflicts of interest and issues regarding impartiality. While the report does not accuse either individual of illegal behavior, it highlights the need for greater transparency and adherence to ethical standards among central bank officials. The Federal Reserve’s implementation of stricter trading rules demonstrates its commitment to upholding public confidence in the integrity of its policymaking processes. Moving forward, it is imperative that all central bank officials prioritize the ethical conduct and impartiality necessary to carry out their public mission effectively.

Global Finance

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