After years of being ‘squeaky clean,’ the Federal Reserve is surrounded by controversy
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The Marriner S. Eccles Federal Reserve building in Washington, D.C., on Friday, Sept. 17, 2021.
Getty Images The Federal Reserve has a big meeting on tap next week, one that will be held under the cloud of an ethical dilemma and a policymaking committee that finds itself with fairly pronounced divisions about the path ahead.| Bloomberg | Getty Images
The Federal Reserve has a big meeting on tap next week, one that will be held under the cloud of an ethical dilemma and a policymaking committee that finds itself with fairly pronounced divisions about the path ahead.
The market expects the Fed will not make major decisions during the session, although it may give some indications that historically low-interest-rate accommodation from the pandemic is ending.
The Fed will announce Wednesday’s post-meeting statement. At that time, individual officials will give their projections about the future of inflation and interest rates.
All of that will be set against a backdrop of controversy: News reports in recent days indicate that Fed officials have been trading stocks and bonds that could be influenced at least indirectly by their policy decisions.
At the same time, speeches over the past several weeks indicate a schism between those who say the time is now to start tightening policy and those who’d rather wait.
Even though the Fed is usually calm, these circumstances may present some unexpected and interesting opportunities.
It’s embarrassing to the Fed, I think. It had such a squeaky-clean reputation,” Greg Valliere, chief U.S. policy strategist at AGF Investments, said of the trading controversy that largely involved regional presidents Robert Kaplan of Dallas and Eric Rosengren of Boston. It won’t change our policy, but I doubt it. It will probably be in the rearview mirror soon, as long as there isn’t another shoe.
However, Valliere noted that this issue would fuel Fed critics like Sen. Elizabeth Warren (D-Mass.), who has been vocal in her criticism of the Fed’s looser regulation approach over the past years.
A matter of credibility
More than that, though, the Fed lives on its credibility, and some of the recent problems could dent that.
There’s the market credibility issue – Wall Street and investors need to believe that the Fed is at least mostly unified in its monetary policy approach to setting interest rates and associated moves that have market impact. Then there’s the public credibility – at a time when faith in Washington’s institutions has plunged, ethical missteps only add to that and can have repercussions, especially at such a delicate time.
It’s a bad example of ethics. They ought to have known better,” Joseph LaVorgna (chief economist for Americas at Natixis, and former chief economic economist of the National Economic Council under the Trump administration) said. The problem is when you lose your moral authority.
Rosengren and Kaplan as well as any Fed official who dealt in stocks, didn’t contravene any laws. In fact, that’s become part of the criticism leveled in some circles – that following the financial crisis the Fed didn’t do a housecleaning when it came to internal rules to make sure it avoided the kinds of conflicts that came to light during the financial crisis.
“Keep in mind, they already have [trading] rules they imposed on banks, for example, and yet the Fed’s governors don’t live by those same rules,” said Christopher Whalen, a Fed veteran and now chairman of Whalen Global Advisors. “After Dodd-Frank [the post-crisis banking reforms], every agency in Washington tightened up little conflicts like insider trading. But the Fed somehow is exempted? It’s absurd.”
The Fed, for its part has stated that it follows rules for other agencies as well as has created supplemental rules.
Jerome Powell, the nominee for the Federal Reserve Board of Governors chairman, meets with Senator Elizabeth Warren (R), Democrat of Massachusetts, before he testifies at his confirmation hearing in Washington, DC’s Senate Banking, Housing and Urban Affairs Committee.
AFP – Getty Images Still. A spokesman for central bank stated that the Chairman had directed Fed staff to “take a fresh, comprehensive look at ethics rules surrounding permissible financial holdings or activities by Fed officials.”| AFP | Getty Images
Still, a spokesman for the central bank said Thursday that Chairman Jerome Powell has directed Fed staff “to take a fresh and comprehensive look at the ethics rules around permissible financial holdings and activities by senior Fed officials,” a spokesman said.
This review will help to identify ways to tighten these rules and standards. “The Board will make any necessary changes. Any changes will be made to the Reserve Bank Code of Conduct.” the official said.
This controversy is occurring against an extremely delicate background for the Fed.
The central bank is preparing to take its first steps to normalize policy again, after slashing benchmark interest rates to zero and doubling the size of its balance sheet through more than $4 trillion in bond purchases.
According to Goldman Sachs, 6 Fed officials have publicly spoken out on tapering asset purchases. Six are in favor. On inflationPowell stated that price pressures will ease quickly, but at least six Fed officials including Governor Christopher Waller have indicated they anticipate inflation staying above the central banks’ 2% goal beyond 2021.
A further problem is Powell’s term expiring in February. Therefore, President Joe Biden plans to soon announce who he prefers to be the leader of the bank. Wall Street is expecting Powell to be renominated, however, there are growing expectations that Biden may replace Randal Quarles, the vice chairman responsible for bank supervision, with Governor Lael brainard. This would likely give him a stronger hand in regulation.
Powell must ensure that the Fed is following sound policy and able to resolve some of the controversies of late.
LaVorgna, a Natixis economist said that “It is not a done deal that Jerome Powell has been reappointed.” “The Administration is going to watch and wait to see how the Fed manages the taper. It could decide whether he gets reappointed.
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