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Fed ethics investigation clears Powell and Clarida

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Federal Reserve Chairman Jerome H. Powell was acquitted in an investigation into the financial activities of top Fed officials, according to a new report released Thursday by the central bank’s Office of the Inspector General.

OIG also cleared former Fed Vice Chairman Richard H. Clarida of failing to report several deals on its 2019 and 2020 disclosure forms. Clarida resigned in January after it was revealed he had amended his public forms to show trades made early in the pandemic, when the Fed was heavily involved in bailing out the financial system.

“[W]“We have found no evidence to support claims that former Vice Chairman Clarida or you violated laws, rules, regulations, or policies related to trading activities that were being investigated by our office,” OIG wrote in a letter to Powell.

The long-awaited report drew sharp criticism from watchdog groups, Fed experts and lawmakers, who said the findings were too vague and did not restore confidence that officials could be punished for any financial wrongdoing.

Senator Elizabeth Warren (D-Massachusetts), who sits on the Senate Banking Committee and has called for tougher Fed ethics rules, tweeted, “This behavior by leading economic policymakers should not be hushed up.”

“We need accountability and stricter ethical rules to end conflicts of interest at the Fed,” she wrote.

The Fed’s OIG report describes how a financial advisor working on behalf of the Powell family trust made five transactions in December 2019 during what it calls the “shutdown period” when Fed officials are barred from engaging in certain financial transactions. The report makes it clear that the deals were expedited after Powell’s wife asked for funds for year-end charitable donations.

The financial adviser later admitted that the execution and timing of the transactions were “an oversight”, and as a result, the OIG did not rule that Powell or members of his family had violated laws or regulations.

The report was released nine months after the Fed’s inspector general launched an investigation into whether the trading activities of senior central bank officials were ethical and legal. The investigation is still working on checking the activities of two other former Fed officials: Eric Rosengren, who headed the Boston Fed, and Robert Kaplan, who headed the Dallas Fed. Both announced their resignations in September.

Fed revises trade rules for senior officials amid scrutiny of past behavior of politicians

The ethics scandal and its aftermath is playing out as the Fed grapples with other major problems in the economy. On Wednesday, new inflation data showed that prices rose 9.1 percent in June from a year earlier, extending another peak and giving the Fed no consolation that its policies are lowering inflation. As a result, the Fed’s path to avoiding a recession is narrowing as the American population is unhappy with the economy and faces high prices for food, gas, rent and everything in between.

Fed says trading activities of senior officials are under independent scrutiny

An audit of Clarida’s trading activities began in October after Bloomberg News reported that in February 2020, he bought shares in an investment fund that held the shares. The move came shortly before the Fed announced its readiness to bail out the economy as the pandemic began to spread, restoring market confidence.

Attention to Clarida’s trades intensified several months later after the New York Times reported that he did not disclose the full extent of his trading. Months after his initial disclosure, Clarida corrected his public records to reveal that he was pulling money out of the equity fund as the pandemic spread and markets fell. Then, three days later, after the markets fell, Clarida moved the money back into the same fund, just before the Fed announced it was ready to step in and provide new economic support to the financial system.

“In the end, OIG conclusively determined that I did not violate any laws, rules, regulations or standards,” Clarida said in a statement Thursday. “I have always striven to conduct myself with integrity and respect the obligations of the public service, and this report confirms that lifelong commitment to exceeding ethical standards.”

Pressure on the Fed and Powell over stock trading among high-ranking officials intensifies as an independent investigation is underway

Experts have more questions about the ongoing investigations, and they say the pressure on Fed officials to meet the highest standards, even outside the law, must remain high.

“As far as the specific allegations and questions are concerned, the facts are undisputed,” said Aaron Klein, senior fellow in economic research at the Brookings Institution. “Clarida made deals and forgot to report them. Powell had a trust that made trades during the blackout. I think what’s more worrying is where are the results for the Fed’s senior staff? And where are the conclusions for the presidents of the regional banks of the Fed?

Dennis Kelleher, president and chief executive officer of Better Markets, which advocates for stronger market regulation, said the investigation was “very narrow, missing key information and not credible.” Kelleher argued that the investigation was never truly independent of the Fed because the central bank’s inspector general is hired by and ultimately reports to the chairman.

“A person like the chairman asking a subordinate like IG to investigate their boss is simply not credible, especially when, like here, the boss has repeatedly publicly stated that no laws or rules have been violated.” Kelleher said in a statement. “A post hoc investigation conducted by a subordinate that concludes that the superior’s previous public statements were accurate is not a credible investigation.”

Kaplan’s trading activity included 27 individual stocks, funds, or alternative assets, each valued at over $1 million. Rosengren’s trading activities were on a much smaller scale, but included stakes in four real estate investment funds at the time that Rosengren was publicly expressing concerns about the commercial real estate sector. His public speaking and speaking engagements have frequently highlighted his concerns about the commercial real estate sector as the economy has weathered the coronavirus-driven recession.

The scandal also increased pressure on Powell to rethink the Fed’s internal policy on what financial activities officials can and cannot engage in. The Fed’s reputation also suffered, leaving Powell to prove to the American public and Congress that the central bank was worthy of public trust.

As part of its clean-up act, the Fed announced a significant tightening of its ethical rules, which now prohibit the purchase of certain securities, restrict active trading, and increase the timeliness of reporting and public disclosure of financial information by politicians and senior Fed officials. Senior Fed officials are also only allowed to buy diversified investment vehicles such as mutual funds.


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