Powell Says Fed Acted Quickly to Tighten Stock-Trading Rules

Powell Says Fed Acted Quickly to Tighten Stock-Trading Rules

‘I think it’s too soon to say what the reputational damage is’ for the central bank in wake of trading controversy, says Fed Chairman Jerome Powell

Federal Reserve Chairman Jerome Powell said Wednesday the financial market trading controversy that led to the departure of two regional Fed bank presidents caught the central bank by surprise, adding the Fed has acted swiftly to ensure the situation never happens again.

“We didn’t imagine the problems that happened,” Mr. Powell said at the press conference following the Federal Open Market Committee meeting. He was referring to stock trading and other financial transactions by the leaders of the Dallas and Boston Fed banks that led them in late September to announce their early retirements.

“We are where we are, it happened, and we just have to deal with it forthrightly and transparently and own it, and step up to this...I’m totally committed to doing that,” Mr. Powell said.

Robert Kaplan, who was president of the Dallas Fed from 2015 until this year, had actively traded millions of dollars in stocks and other investments while leading his institution. Meanwhile, Eric Rosengren, chief of the Boston Fed since 2007, traded on a more modest scale. The men’s trading was first reported by The Wall Street Journal. Mr. Kaplan said he was leaving to avoid further distraction for the central bank, while Mr. Rosengren said he moved up his impending retirement due to health issues.

Both men defended their market activity as consistent with central bank rules that prohibited Fed officials from owning bank stocks and trading around FOMC meetings. But those voluntary rules, last updated in the mid-1990s, also called on officials to refrain from any activity that would create a public perception that officials were setting policy to benefit their own pocketbooks over the needs of the nation.

Mr. Powell said those rules had appeared to function well for many years, but they had become unevenly applied through the Fed system. The 12 regional banks, while operating under the oversight of the Fed in Washington, are quasi-private institutions owned by member banks, and had primary responsibility for policing their own ethical standards.

The Fed faced broad criticism over the trading, which some said undermined the central bank’s credibility as an institution working on behalf of the public. On Wednesday, Mr. Powell said the jury remains out on that issue, saying “I think it’s too soon to say what the reputational damage is” for the Fed.

After the resignations of the two Fed bank presidents, the central bank moved swiftly to prevent a repeat of the situation. In September, the Fed announced a review of its ethics rules. In October, it said it was banning officials from financial-market trading beyond investments in diversified mutual funds, and imposed restrictions on even that type of investing. Meanwhile, a group of Democratic senators proposed to codify similar restrictions on Fed officials into law, with financial penalties for those who don’t comply.

“Within one FOMC cycle we announced a new set of rules to—you know, to try to put us back where we need to be, which is we need to have the complete trust of the American people that we’re working in their interest all the time. Absolutely critical to our work, as it is for any government agency,” Mr. Powell said. The trading scandal “called that into question, so we reacted, I would characterize it, strongly and forcefully,” the Fed leader said.

The Fed’s trading controversy is the subject of an continuing internal investigation by its inspector general. Meanwhile, the Dallas Fed hasn’t provided a full accounting of the trading done by Mr. Kaplan, whose activities were so extensive that central bank financial disclosure forms were unable to capture the full extent of the transactions. Sen. Elizabeth Warren (D., Mass.) has called for securities regulators to examine trading by Fed officials.

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