In the fall of 2021, a series of trading scandals rocked the Federal Reserve and cast doubt on every aspect of its ethics program, from disclosure practices and vetting standards to enforcement mechanisms. The message to the public was clear: under chairman Jerome Powell, the Federal Reserve’s sole executive officer and the official to whom the institution’s staff reports, ethical conduct was not a priority. After initially brushing off the seriousness of these revelations, Powell seemingly sought to change that impression by instituting new ethics standards and launching an Inspector General’s investigation.
However, observers quickly emphasized that these steps were inadequate to guard against future conflicts of interest and to offer a complete and trustworthy accounting of all wrongdoing. Further, Powell has failed to acknowledge that the behavior in question did not satisfy existing requirements that officials “avoid even the appearance of a conflict of interest.” He has yet to detail any changes to vetting standards or enforcement practices that would ensure future wrongdoing does not go undetected. Moreover, although he claims publicly to be taking these problems seriously, information that he and Federal Reserve staff members have provided to the press has been at times misleading and even blatantly false. Despite these deficiencies, Powell has signaled that the ethics problems at the Federal Reserve have been managed and that the institution can move on.
Powell is wrong, as new reporting from the New York Times made clear last week. That article revealed that Vice Chair Richard Clarida was engaged in more active trading than was previously known in the days leading up to Chair Powell’s February 2020 announcement that the Federal Reserve would intervene to support the economy in the event of pandemic-related disruptions. Federal Reserve spokespeople had characterized a narrower set of trades in that time frame that had previously been disclosed as “routine rebalancing” for the Vice Chair’s portfolio. The trades that were disclosed in the December 2021 amendment to Clarida’s disclosure forms, however, undermine that claim while raising questions about how Federal Reserve staff came to mislead the public on Clarida’s behalf. This latest revelation makes clear that the deficiencies that paved the way for the scandals this Fall remain. To safeguard public trust in the Federal Reserve, the next chair will need to urgently and thoroughly address them.
Jerome Powell’s nomination to a second term as Federal Reserve chair must be assessed in this context. It is, therefore, of the utmost importance that you obtain additional information about Powell’s handling of the scandals thus far and his intended response moving forward. We ask that, in the confirmation hearing or in writing, you pose the following questions:
- As the potential scope of Federal Reserve Covid 19 response became clear, what is the first conversation you can recall about the implications on the ethics of otherwise acceptable trades by FOMC members?
- The New York Times has reported that a March 23, 2020 email from the Board of Governors’ ethics unit suggested that senior Federal Reserve officials “might want to avoid unnecessary trading for a few months as the Fed dived deeper into markets.” When did you become aware of this email? What came of this suggestion? Was this the only communication, from any source within the Federal Reserve, that called for officials to adhere to higher ethical standards during the intervention period? If not, please describe the other conversations (over video conferencing, email, messaging apps, or other means) of which you were aware.
- Did anyone at the Federal Reserve suggest more stringent limitations on senior official financial transactions than was ultimately implemented? If so, how did you respond? Why were they not heeded?
- Last week, the New York Times reported that Vice Chair Richard Clarida initially failed to disclose the sale in late February 2020 of between $1 million and $5 million in a stock fund. The transaction, which appeared in an amended disclosure form in December 2021, came three days before Clarida’s previously disclosed purchase of a stock fund in the same range of values, calling into question the Federal Reserve’s prior statement that that purchase was part of a routine rebalancing of Clarida’s portfolio. Were you aware, prior to the New York Times reporting, that Richard Clarida’s personal financial disclosures were incomplete and inaccurate throughout the majority of 2021? If so, when did you learn of the problem? What steps did you take immediately after you were made aware? Has anyone at the Federal Reserve referred the case to the Securities and Exchange Commission or the Department of Justice? What are you doing to determine if similar omissions remain in the disclosures of any FOMC members or senior staff? What will be the consequences for these ethical failures at the Federal reserve?
- By statute you are the Federal Reserve’s sole “active executive officer.” As such, what guidance did you direct Federal Reserve ethics officials to provide to the rest of the Board of Governors, Federal Regional Bank presidents, and other senior officials about trading during the course of unprecedented pandemic era interventions into financial markets?
- Is there anyone within the Legal Division who suggested ethical concerns were overblown? In light of the regional bank president resignations and questions concerning trades of Clarida, Quarles, and yourself, has anyone been held to account for failing to implement more stringent regulations and/or transparency measures?
- When Vice Chair Richard Clarida’s trades first came under scrutiny, a spokesperson at the Federal Reserve characterized the moves as a “preplanned rebalancing.” The reporting referenced above strongly suggests that this was a mischaracterization. Are you troubled that Federal Reserve resources (in the way of staff time) were devoted to advancing a seemingly dishonest narrative to protect one of its board members? What steps, if any, do you intend to take to ensure that something similar doesn’t happen again?
- Can you express confidence at this time that the public knows the full extent of the actions Federal Reserve leaders have taken throughout the coronavirus pandemic that create the appearance of a conflict of interest? If not, what steps are you taking to ensure that you can express that confidence and on what timeline?
- In a September 22 press conference, you told CNBC reporter Steve Liesman that the Office of Government Ethics reviewed your financial holdings and indicated that you did not have a conflict of interest with regards to the Federal Reserve’s emergency measures. Yet a Freedom of Information Act request to your office reveals no communication of any kind between your office and the Office of Government Ethics since the beginning of the pandemic. Can you describe the form of support you have received from that Office, or any other ethics official, for your personal trades during the pandemic? And did the Federal Reserve as an institution ever receive formal input from the Office of Government Ethics about potential ethical implications for individual trading due to the unusual circumstances of pandemic era Federal Reserve market interventions?
- You have described the Inspector General investigation into the Federal Reserve trading scandal as independent. However, the Inspector General was hired by the Federal Reserve Board of Governors and can be fired by the Federal Reserve without any requirement the Board show cause. In what sense is this investigation independent? Would you agree that the Federal Reserve needs to allow an actually independent investigation into the actions in Dallas, Boston, and across the Federal Reserve system?
- What transactions have you made in 2021 that will be reported on your personal financial disclosure for 2021 that will be made public in spring 2022?
Revolving Door Project
Photo courtesy of the Federal Reserve