Fed Officials’ Trading Draws Outcry, and Fuels Calls for Accountability

Federal Reserve officials traded stocks and other securities in 2020, a year in which the central bank took emergency steps to prop up financial markets and prevent their collapse — raising questions about whether the Fed’s ethics standards have become too lax as its role has vastly expanded.

The trades appeared to be legal and in compliance with Fed rules. Million-dollar stock transactions from the Dallas Fed president, Robert S. Kaplan, have drawn particular attention, but none took place when the central bank was most actively backstopping financial markets in late March and April.

However, the mere possibility that Fed officials might be able to financially benefit from information they learn through their positions has prompted criticism of perceived shortcomings in the institution’s ethics rules, which were forged decades ago and are now struggling to keep up with the central bank’s 21st century function.

“What we have now is an ethics system built on a very narrow conception of what a central bank is and should be,” said Peter Conti-Brown, a Fed historian at the University of Pennsylvania.

The Fed has gone from serving as a lender of last resort mostly to banks to, at extreme moments in both 2008 and 2020, using its tools to rescue large swaths of the financial system. That includes propping up the market for short-term corporate debt during the Great Recession and backstopping long-term company debt and enabling loans to Main Street businesses during the 2020 pandemic crisis.

That role has helped to make the Fed and its officials privy to information affecting every corner of finance.

Yet central bankers can still actively buy and sell most stocks and some types of bonds, subject to some limitations. They have long been barred from owning and trading the securities of supervised banks, in a nod to the Fed’s pivotal role in bank oversight, but those clear-cut restrictions have not widened alongside the Fed’s influence.

“Just as there is a set of rules for bank stocks, why not look to see if it is valuable to expand that to other assets that are directly affected by Fed policy?” said Roberto Perli at Cornerstone Macro, a former Fed Board employee himself. “There are plenty of people out there who think the Fed does nefarious things, and these headlines may contribute to that perception.”

The 2020 batch of disclosures has received extra attention because the Fed spent last year unveiling never-before-attempted programs to save a broad array of financial markets from pandemic fallout. Regional Fed presidents like Mr. Kaplan did not vote on the backstops, but they were regularly consulted on their design.

Critics said that raised the possibility — and risked creating the perception — that Fed presidents had access to information that could have benefited their personal trading.

Mr. Kaplan made nearly two dozen stock trades of $1 million or more last year, a fact first reported by The Wall Street Journal. Those included transactions in companies whose stocks were affected by the pandemic — such as Johnson & Johnson and several oil and gas companies — and in firms whose bonds the Fed eventually bought in its broad-based program.

None of those transactions took place between late March and May 1, a Fed official said, which would have curbed Mr. Kaplan’s ability to use information about the coming rescue programs to earn a profit.

But the trades drew attention for other reasons. Mr. Conti-Brown pointed out that Mr. Kaplan was buying and selling oil company shares just as the Fed was debating what role it should play in regulating climate-related finance. And everything the Fed did in 2020 — like slashing rates to near zero and buying trillions in government-backed debt — affected the stock market, sending equity prices higher.

“It’s really bad for the Fed, people are going to seize on it to say that the Fed is self-dealing,” said Sam Bell, a founder of Employ America, a group focused on economic policy. “Here’s a guy who influences monetary policy, and he’s making money for himself in the stock market.”

Mr. Perli noted that Mr. Kaplan’s financial activity included trading in a corporate bond exchange-traded fund, which is effectively a bundle of company debt that trades like a stock. The Fed bought shares in that type of fund last year.

Mr. Kaplan’s colleague Eric Rosengren, president of the Federal Reserve Bank of Boston, also drew criticism for trading in securities tied to real estate. He regularly called attention to issues in the real estate market last year, warning that the virus was likely to make it hard for indebted office buildings and households to pay the bills.

None of Mr. Rosengren’s transactions took place during March or April, though several occurred in May, when the commercial real estate industry was still actively lobbying for help.

Mr. Rosengren “follows the rules for what is allowed in what windows of time, and makes his decisions only based on his own observations,” Joel Werkema, a spokesman for the Boston Fed, said in an email.

Other key policymakers, including the New York Fed president, John C. Williams, reported much less financial activity in 2020, based on disclosures published or provided by their reserve banks. Mr. Williams told reporters on a call on Wednesday that he thought transparency measures around trading activity were critical.

“If you’re asking should those policies be reviewed or changed, I think that’s a broader question that I don’t have a particular answer for right now,” Mr. Williams said.

Washington-based board officials reported some financial activity, but it was more limited. Jerome H. Powell, the Fed chair, reported 41 recorded transactions made by him or on his or his family’s behalf in 2020, but those were typically in index funds and other relatively broad investment strategies. Randal K. Quarles, the Fed’s vice chair for supervision, recorded purchases and sales of Union Pacific stock last summer. Those stocks were assets of Mr. Quarles’s wife and he had no involvement in the transactions, a Fed spokesman said.

The Fed system is made up of a seven-seat board in Washington and 12 regional reserve banks. Board members — called governors — are politically appointed and answer to Congress. Regional officials — called presidents — are appointed by their boards of directors and confirmed by the Federal Reserve Board, and they do not answer to the public directly. Regional branches are chartered as corporations, rather than set up as government entities.

The most noteworthy 2020 transactions happened at the less-accountable regional banks, which could call attention to Fed governance, said Sarah Binder, a political scientist at George Washington University and the author of a book on the politics of the Fed.

“It highlights the crazy, weird, Byzantine nature of the Fed,” Ms. Binder said. “It’s just almost impossible to keep the rules straight, the lines of accountability straight.”

The board and the regional banks abide by generally similar ethics agreements. Employees are prohibited from using nonpublic information for gain. Officials cannot trade in the days around Fed meetings and face 30-day holding periods for many securities. Regional banks have their own ethics officers who regularly consult with ethics officials at the Fed’s Board, and presidents and governors alike disclose their financial activity annually.

Pressure could grow for the Fed to adopt more stringent rules, recognizing the special role the central bank plays in markets. That could include requiring officials to invest in broad indexes. The Fed could also apply stricter limits to how much officials can change their investment portfolios while in office, or expand formal limitations to ban trading in a broader list of Fed-sensitive securities, legal experts and former Fed employees suggested in interviews.

Fed-related financial activity has drawn other negative attention recently. Janet L. Yellen, the former central bank chair, faced criticism when financial documents filed as part of her nomination for Treasury secretary showed that she had received more than $7 million in bank and corporate speaking fees in 2019 and 2020, after leaving her top central bank role.

The Federal Reserve Act limits governors’ abilities to go straight to bank payrolls if they leave before their terms lapse, but speaking fees from the finance industry are permitted.

Defenders of the status quo sometimes argue that the Fed would struggle to attract top talent if it curbed how much current and former officials can participate in markets and the financial industry. They could face big tax bills if they had to turn financial holdings into cash upon starting central bank jobs. Because Fed officials tend to have financial backgrounds, banning financial sector work after they leave government could limit their options.

But few if any argue that former officials would command such large speaking fees if they had never held central bank leadership positions. And it is widely accepted that the ability to trade while in office as a Fed president raises issues of perception.

“People will ask, fairly or otherwise, about the extent to which his views about the balance sheet are interest rates are influenced by his personal investments in the stock market,” Ms. Binder said of Mr. Kaplan’s trades. “That is not good for the Fed.”