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Fed Watch: Investment Ethics Concerns Blur Fed’s Stimulus Policy Debate

Published 20/09/2021, 05:35 pm
Updated 02/09/2020, 04:05 pm

Probably the last thing Federal Reserve Chairman Jerome Powell wanted to see as his re-nomination is hanging fire is an ethics controversy about Fed policymakers reaping profits from investments in markets that expansive monetary policy is fueling.

First, it emerged that two regional bank presidents, Robert Kaplan in Dallas and Eric Rosengren in Boston, actively traded stocks last year when the Fed adopted emergency stimulus policies that have pushed stock markets to successive new records.

Kaplan, a former vice chairman of Goldman Sachs, made trades of more than $1 million in 22 individual company stocks or investment funds, including Apple (NASDAQ:AAPL), Alibaba (NYSE:BABA), Amazon (NASDAQ:AMZN), General Electric (NYSE:GE), and Chevron (NYSE:CVX). Rosengren’s trades in real estate investment trusts were much smaller.

Both men pledged to sell individual stocks by the end of September and hold the proceeds in cash or passive investments to avoid even the appearance of conflict of interest.

Ethics Guidelines Under Review: Warren Urges Tighter Rules

Powell ordered a review of ethics guidelines on stock trades by senior Fed staff and Massachusetts Senator Elizabeth Warren wrote to each of the 12 regional banks urging them to tighten rules on stock trading.

But it turns out that Powell’s own investment portfolio grew strongly last year and now approaches as much as $100 million (not counting his real estate assets). Powell was a partner at the Carlyle Group for several years and then founded his own investment firm before being appointed to the Fed board of governors in 2012. He is well known as one of the world’s richest central bankers.

Most of Powell’s investments are handled by independent asset managers over whom he has no control. But CNBC disclosed that Powell held up to $2.5 million in municipal bonds in a joint account under his control last year when the Fed bought $5 billion in munis.

Richmond Fed President Thomas Barkin held up to $3 million in corporate bonds as the Fed was buying $46.5 billion of the corporate funds. Rosengren held up to $800,000 in REITs that owned mortgage-backed securities and traded them 37 times while the Fed was buying $700 billion in MBS.

Powell has insisted that the Fed needs to continue its $120 billion in monthly bond purchases because the US has not reached maximum employment, and the new controversy has emerged as investors expect the Fed to provide some clues as to when it will start reducing them.

Ethics Controversy Could Pressure Tapering Timeline

The Fed may indicate its timing after the Federal Open Market Committee meeting this week, and the ethics controversy probably adds to the pressure to set a schedule for tapering the stimulus.

Some analysts have criticized the bond purchases for contributing to inequality because they benefit the wealthy by inflating financial markets. One prominent critic of the Fed, Better Markets CEO Dennis Kelleher, told CNBC that the officials’ defense of their trades by saying they comply with existing ethics guidelines shows how “woefully deficient” these policies are.

President Joe Biden needs to announce his decision on whether to keep Powell as Fed chairman sometime soon. The president already faces considerable pressure from progressive Democrats to replace him and appoint someone who will make Fed leadership more diverse and responsive to issues like climate change and bank regulation.

ECB Stimulus Pullback Might Also Be Ahead

The European Central Bank, meanwhile, is increasingly riven over its own monetary stimulus. Several members of the ECB governing council last week expressed concern that inflation is outpacing expectations and could force a pullback in stimulus.

The Financial Times fanned the controversy by reporting that ECB chief economist Philip Lane told German bank economists that the eurozone central bank will reach its 2% inflation target by 2025, implying that it could start raising its deposit rate from minus 0.5% in 2023, a year earlier than expected.

The ECB denied the report, saying it does not conform to the bank’s current forward guidance and suggesting Lane’s remarks had been misunderstood. Still, coming amid growing concern about inflation, the report pushed yields on eurozone government bonds higher.

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