An independent government watchdog with oversight of the Federal Reserve has initiated a review into whether trading conducted last year by top officials met ethics standards and complied with the law.
The investigation, which was disclosed by the Fed on Monday, comes after Jay Powell, chair of the US central bank, last month said he would launch a review of its ethics guidelines after it emerged that two officials had actively traded at a time when the institution was aggressively shoring up financial markets.
“As part of our comprehensive review, we began discussions last week with the Office of Inspector General for the Federal Reserve Board (OIG) to initiate an independent review of whether trading activity by certain senior officials was in compliance with both the relevant ethics rules and the law,” the Fed said in the statement.
Two regional presidents — Eric Rosengren of the Federal Reserve Bank of Boston and Robert Kaplan of the Dallas Fed — have resigned while the trading activities of a third senior Fed official, vice-chair Richard Clarida, have also come under scrutiny.
“We welcome the [OIG] review and will accept and take appropriate actions based on its findings,” the Fed said.
The announcement of the probe came just hours after Elizabeth Warren, the Democratic senator from Massachusetts, urged the top US securities regulator to investigate “ethically questionable” transactions by Clarida, Rosengren and Kaplan and whether they “violated insider trading rules”.
“The reports of this financial activity by Fed officials raise serious questions about possible conflicts of interest and reveal a disregard for the public trust,” Warren wrote in a letter to Gary Gensler, the chair of the Securities and Exchange Commission.
“They also reflect atrocious judgment by these officials, and an attitude that personal profiteering is more important than the American people’s confidence in the Fed.”
Clarida moved between $1m and $5m out of a bond fund and into a stock fund on February 27, a day before Jay Powell, Fed chair, issued a rare statement in between policy-setting meetings that suggested the central bank was preparing take action to support the economy. Days later, the Fed announced an emergency interest rate cut.
Clarida’s transactions were part of a “pre-planned rebalancing”, according to the Fed, and were executed before his involvement in any relevant deliberations. They also had prior approval from the Fed’s ethics officials, the Fed said.
Clarida’s trading activity, which was first disclosed by Bloomberg, came to light shortly after Kaplan and Rosengren announced their resignations following reports of their transactions. Rosengren departed his post last week, while Kaplan is set to leave his post at the end of the week.
At congressional hearings last week, Powell vowed the rules would be tightened and said any appearance of a conflict of interest was “obviously unacceptable”.
“If these trades were based on Fed officials’ knowledge of non-public, market moving information, they may have represented potentially illegal activity,” Warren added in her letter.
Warren’s intervention comes just a week after she said she would oppose Powell’s renomination as chair of the Fed, describing him a “dangerous man” owing to his record on banking regulation.
Powell, once seen as a shoo-in for a second term, is facing a tricker path to renomination owing to the opposition from Warren and some other progressives, high inflation and the trading scandal at the central bank.
The SEC, the Federal Reserve Bank of Dallas and the Boston Fed declined to comment.
Additional reporting by Stefania Palma in Montreal
