The Federal Reserve’s Inspector General said Chair Jerome Powell and former Vice Chair Richard Clarida’s trading activity had not broken any laws or rules, but the probe into the former heads of the Dallas and Boston regional Fed banks remained open.
“We did not find evidence to substantiate the allegations that former Vice Chair Clarida or you violated laws, rules, regulations, or policies related to trading activities as investigated by our office,” Inspector General Mark Bialek said in a letter to Powell dated July 11 and published Thursday. “The investigation of senior Reserve Bank officials is ongoing.”
The Fed imposed sweeping restrictions this year on officials’ investing and trading following an embarrassing ethics scandal, which prompted allegations of corruption and demands from U.S. lawmakers for change.
Bloomberg News
The IG said a financial advisor to a Powell family trust made five trades during a Fed blackout period — following a request by Powell’s wife to make funds available for charitable donations during December — and the trust advisor “subsequently acknowledged that executing the trades during the blackout period was an ‘oversight’ on the team’s part.”
“We found no evidence that you or your spouse had contemporaneous knowledge that the five transactions were executed during the blackout period,” Bialek said. “As such, we found that you did not violate the FOMC trading blackout rule,” he added, referring to the policy-setting Federal Open Market Committee.
The IG also said that Clarida failed to report several trades in his 2019 and 2020 financial disclosures. Clarida told the IG that in responding to its inquiries, he discovered that he had inadvertently omitted one trade from his 2019 disclosure form and three trades from his 2020 form.
Clarida’s 2020 disclosures showed he sold at least $1 million of shares in a U.S. stock fund in February 2020 before buying a similar amount of the same fund a few days later, on the eve of a major Fed announcement that signaled its readiness to buffer the economy from the coronavirus. Clarida stepped down Jan. 14 ahead of the expiration of his term as a governor on Jan. 31.
A spokesman for Clarida said the move was pre-planned.
“I am gratified by the conclusions of the Federal Reserve’s Office of Inspector General, which finds that I went above and beyond financial ethics and disclosure requirements during my tenure as Vice Chair,” Clarida said in a statement.
Bialek said that the IG would provide a detailed analysis at the conclusion of its investigation into trading by the former regional Fed chiefs.
Then-Boston Fed President Eric Rosengren and his Dallas counterpart, Robert Kaplan, stepped down last year after questions were raised about their unusual trading activity during 2020 as the Fed fought to shield the economy from the pandemic. Rosengren cited ill health in announcing his early retirement.
Rosengren’s 2020 financial disclosure showed multiple transactions in real estate investment trusts, even as the Fed was intervening in that sector of the economy via massive purchases of mortgage-backed securities. Kaplan, a former senior Goldman Sachs Group Inc. executive, disclosed multiple $1 million-plus transactions that year.
Kaplan has not disclosed the dates of his transactions, a year in which he was a voting member of the Federal Open Market Committee and privy to confidential market-moving information. Bloomberg News asked Powell for the dates in a news conference. He said he didn’t have them. Bloomberg subsequently asked the Fed for them via a Freedom of Information Act request. The Fed’s Inspector General invoked an exemption to deny the request.
While the Fed’s new trading rules imposed tough restrictions on top officials, they were also an admission that the central bank’s old ethics standards were not sufficient. Powell, who requested the new guidelines, was also responding to demands for change by lawmakers, with Senator Elizabeth Warren calling out a “culture of corruption” at the Fed after the trading activity came to light.
In a tweet following publication of the IG’s letter, Warren said “We need accountability & stronger ethics rules to end conflicts of interest at the Fed.”
Senate Banking Democrats this week criticized the Fed’s lack of transparency around the internal probe, and the lack of accountability in the new trading rules.
“The Federal Reserve’s new investment and trading policy fails to set forth any standards for disciplinary action, financial penalties, or other meaningful consequences for violations,” Senate Banking Committee Chair Sherrod Brown and other Democrats said in a letter to Powell this week.