Scrutiny on Federal Reserve Intensifies

The Federal Reserve is coming under greater scrutiny from inside and outside its walls following revelations about market trading by senior officials in 2020 as the coronavirus forced the central bank to leap to the rescue of the U.S. economy.

Days after Bloomberg News first reported trades made last year by Vice Chair Richard Clarida, the Fed said late Monday that its internal watchdog will review whether actions by “certain senior officials [were] in compliance with both the relevant ethics rules and the law.”

“We welcome this review and will accept and take appropriate actions based on its findings,” the Fed said in a statement.

The announcement came the same day Senator Elizabeth Warren called on the Securities and Exchange Commission (SEC) to investigate whether the transactions violated insider trading rules. Told subsequently of the Inspector General’s probe, Warren said “Good, they should. The SEC should also open an investigation. This is serious.” An SEC spokeswoman declined to comment on Warren’s request, as did a Fed spokeswoman.

Clarida traded between $1 million and $5 million out of a bond fund into stock funds one day before Chair Jerome Powell issued a statement flagging possible monetary-policy action as the pandemic worsened, his 2020 financial disclosures show. Two regional Fed chiefs also recently announced their departures after details emerged about their trading activity last year.

Powell, who is waiting to learn whether President Joe Biden will nominate him for a second term, had already opened an internal examination of the central bank’s ethics rules. Warren is opposed to his reappointment, citing his record regulating Wall Street.

All the Facts

Speaking with reporters on September 22, Powell promised a “thorough-going and comprehensive review. We’re going to gather all the facts and look at ways to further tighten our rules and standards.”

The Inspector General has the authority to contact law enforcement agencies whenever an investigation indicates that criminal statutes may have been violated.

Senator Patrick Toomey of Pennsylvania, the top Republican on the Senate Banking Committee, said an investigation “makes sense.”

“It is important that the public have a very high level of confidence that no senior Fed official is engaged in creating any kind of conflict of interest,” Toomey said.

The Fed’s information-security guideline has specific rules around trading, noting that “an employee with knowledge” of confidential policy information “should avoid engaging in any financial transaction the timing of which could create the appearance of acting on inside information concerning Federal Reserve deliberations and actions.”

Speaking on Clarida’s behalf, a Fed spokesman said in an October 1 statement that the transactions, which were released in mid-May, were a “pre-planned rebalancing to his accounts, similar to a rebalancing he did and reported in April 2019” and were “executed prior to his involvement in deliberations on Federal Reserve actions to respond to the emergence of the coronavirus and not during a blackout period.”

Late February 2020 was a time of extreme moves in financial markets as investors encountered the threat of the pandemic spreading across the United States.

In the six days leading up to February 27, the S&P 500 index fell more than 10 percent from a then-record high. At the same, time the bond markets were in a powerful rally, with yields on U.S. 2-year notes plunging as traders began to anticipate a rate cut from the Fed.

The Fed delivered an emergency half percentage-point interest-rate cut on March 3.

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