Analysis-Powell, juggling policy and renomination, now faces an ethics blowup By Reuters
© Reuters. FILE PHOTO: Federal Reserve Chairman Jerome Powell takes his seat to testify before a Senate Banking, Housing and Urban Affairs Committee hearing on “The Semiannual Monetary Policy Report to the Congress” on Capitol Hill in Washington, U.S., July 15,
By Howard Schneider
WASHINGTON (Reuters) – It is perhaps as predictable as it is problematic: Within days of news that two Federal Reserve bank presidents had engaged in controversial stock trades, one of the fiercest critics of the U.S. central bank’s financial system oversight demands new ethics rules that would bar such dealings in the future.
Jerome Powell is not happy with the situation. Powell, who is under consideration to be reappointed as Fed chief and also trying to coordinate a significant change in U.S. monetary policy, faces controversy that the Fed has created. It helps support arguments from progressives for more central bank change.
Powell is still favored by President Joe Biden for renomination. If history can be trusted, a decision could come between next week’s Fed policy meeting and the two-day session Nov. 2-3. It would also coincide with the date when the two Fed chair nominations were made.
Democratic Senator Elizabeth Warren’s Wednesday letter https://www.warren.senate.gov/imo/media/doc/Letters%20pdf.pdf to the Fed’s 12 regional presidents asking them to “impose strong and enforceable ethics and financial conflicts of interest rules” and send her an action plan “no later than Oct. 15,” is at a minimum a distraction to Powell at a time when he is steering the Fed through complex debate over monetary policy.
Next week’s Fed meeting will likely take an important step to flag possible changes to pandemic-related programs. This is the kind of moment that demands deft communication during the Fed chair’s post-meeting conference. Now muddled with likely questions about his investing habits and potential damage to public trust, it will require the Fed chair to communicate clearly.
“Institutionally, it’s a bad look,” said Tim Duy, chief U.S. economist at SGH Macro Advisors and an economics professor at the University of Oregon. “It’s better to get ahead of this.”
Powell took the initiative and launched a wide-ranging review of Fed regulations governing investment by top officials. [L1N2QI1D0]
However, Warren’s demand for immediate change could lead to a conflict with a top Democratic lawmaker when Biden picks the Fed chair.
Warren, who is also a member on the Senate Banking Committee that will veto the nominee’s nomination, voted against Powell in the Fed Chair position four years back. He has criticised the Fed’s financial regulation approach under his watch, and has yet express an opinion regarding his potential renomination.
While she acknowledged the Dallas Fed President Robert Kaplan’s and Boston Fed President Eric Rosengren’s actions to sell these investments, she said it was not clear that the decision was made in an “ethic firestorm”. She also stated that there is no assurance “that Fed officials act solely in public interest, rather than based on financial considerations.”
Although the Fed’s 12 regional banking institutions are part of its Federal Reserve system, they operate in quasi-private status with their own boards and directors. Many of them come from the financial industry. These presidents share five rotating votes in monetary policy with up to seven members of a Washington-based Board of Governors.
Representatives stated that Warren’s letters were being looked at by regional reserve banks.
The controversy, regardless of whether it has any impact on Powell’s nomination, is damaging to two issues that Fed Chair John Powell placed at the core of his tenure: building public trust in Fed management and not only for its investors class; building support for Fed independence from congressional lawmakers who are critical of central bank’s expanded role in the economy after the last crisis.
Both of these issues he had made significant progress on.
He is more likely to meet with legislators one-on-1 than Janet Yellen, Ben Bernanke’s immediate predecessors. He has received renomination endorsements in recent days from senators representing both the Democratic and Republican parties.
A revamp of monetary policy last year put new emphasis on job growth and led many supporters of Biden, including progressive, labor-focused economists https://www.politico.com/news/magazine/2021/09/15/progressives-biden-jerome-powell-fed-chair-511947, to argue that Powell had earned a second four-year term when his current one expires in February.
However, he is criticized for his apparent closeness to Wall Street as well as his willingness to relax on regulation of banks, which may be putting him at risk of being regulated by other central bankers.
“Powell still hasn’t acted. “He hasn’t yet effectively cut off the flow to Rosengren, Kaplan with insider information,” stated Jeff Hauser (founder of progressive Revolving Door), which opposed Powell’s renomination for Fed Governor Lael Mindard.
Hauser stated that the immediate, necessary and even insufficient step was to put them on administrative leave ….”. It will increase distrust in people who are concerned about insider trading, financial regulation, and ethics.