Just about the last thing the Fed needed at a time when untold millions of Americans can’t differentiate fact from fiction, truth from lies and reality from fantasy, was a mini-scandal that aligns with sundry conspiracy theories.
Jerome Powell’s language during last week’s post-FOMC press conference suggested Robert Kaplan and Eric Rosengren might ultimately be compelled to take one for the team following “revelations” that the two men traded securities last year during the Fed’s unprecedented push to backstop the economy and financial markets amid the worst economic downturn in a century.
“No, I was not aware of the specifics of what they were doing,” Powell said, when asked about Rosengren and Kaplan. He went on to call the current framework for preventing the appearance of conflicts “clearly not adequate to sustain the public trust.”
Read more: How To Solve The Fed’s ‘Embarrassing’ Ethics Problem
Fast forward a few days and — surprise, surprise — both Rosengren and Kaplan decided to retire, the former citing health reasons and the latter the trading controversy, which Kaplan described as “a distraction” at a “critical point” in the nation’s recovery from the pandemic.
As for Rosengren, he’s eligible for a kidney transplant, according to a message to bank staff. “It has been an honor to serve… in a job where one can be constantly engaged in pursuing the economic and financial well-being of the country and New England,” he said. “I know that my colleagues will build on our progress, and continue making a difference for the public we serve.”
Kaplan contended he did nothing wrong. “During my tenure, I have adhered to all Federal Reserve ethical standards and policies,” he insisted on Monday. “My securities investing activities and disclosures met Bank compliance rules and standards.”
Kaplan’s retirement is effective October 8, Rosengren’s September 30.
Powell was kinder to Rosengren than Kaplan. Or at least it came across that way. “We are grateful for Rob’s six years of service,” he said of Kaplan, calling him a “passionate and forceful public voice on a wide range of issues, including the critical value of early childhood education and literacy.”
“Eric has distinguished himself time and again during more than three decades of dedicated public service,” Powell said of Rosengren, adding that he served through two crises and “brought a relentless focus on how best to ensure the stability of the financial system.”
Powell closed his brief statement on Kaplan with this: “We wish him well.” By contrast, he emphasized that he and the Fed “will miss” Rosengren.
Having delivered my take on this last week (see the linked article above), I don’t have much to add, other than to state the obvious. It’s at least possible that Kaplan and Rosengren had to go, and in a hurry, lest the controversy undermine Powell’s bid for a second term. At the least, Powell’s critics will bemoan his apparent obliviousness. At worst, they’ll say his own portfolio contributed to the poor optics. The unprecedented ouster of two Fed presidents on the same day may be an attempt to blunt some of that criticism.
Meanwhile, analysts will spend the next week wondering what this means for the hawk/dove balance, a question which can’t be answered immediately.
As Bloomberg wrote, the “intense scrutiny” surrounding the current situation, along with pressure to diversify the Fed’s ranks, means the Fed’s Board of Governors is becoming “more deeply engaged in the search and selection process.” Lael Brainard, the only serious contender for Powell’s job other than Powell, “will act as liaison with the Boston board during its search,” the same linked article said.
Last week, I suggested that if institutions like the Fed are truly committed to diversity, they might try adopting a similar system to that used in college admissions. “We could cap the number of asset-wealthy white men, not because there’s anything wrong with being rich and white, but because the Fed would benefit from diversity on its own ‘campus,’ where that means reserving a certain number of seats at various tables for, say, African American males with less than $50,000 in financial assets or Hispanic females who don’t own rate-sensitive securities,” I wrote.
On Monday evening, Bloomberg noted that “the most recent presidential selections have attracted varying levels of criticism.” Although Raphael Bostic’s appointment in 2017 was well received, as was Mary Daly’s selection a year later, “four other spots went to white men, three of whom were Fed insiders.”
Yikes. “No, I was not aware of the specifics of what they were doing” is not the most emphatic denial I have ever heard in my life. This doesn’t come at a good time for Powell. If he didn’t know the specifics, what did he know?
No, the optics don’t look good.
We are in the middle of a pandemic. Markets are crashing. Rich people, for a change, are getting somewhat less rich. And the Fed decides to double its balance sheet sending stocks sky high. Meanwhile, as it’s happening, the Fed governors are trading for profit.
No, that doesn’t look great. The public already doesn’t trust the Fed. I don’t trust the Fed. Seems like it’s basically set up just to make rich people richer.
Really? The Fed has also kept the financial system – and real economy – from breaking down, twice in the last two decades.
Granted, the system is, to say the least, flawed. Keeping it working didn’t make the poor rich or the rich poor. But if it stops working, the average rich would be merely very very very affluent; the average poor would be lying in the street.
I think many have an exaggerated idea of what the Fed can and can’t do. Its tools are macro-scale, not granular. It can make the tide rise, it can’t make all the boats equal. That’s up to Congress, states, other parts of government, and ultimately voters.
Yep.
@Elmerfudd: Markets are crashing? Which markets are those?
Our society is way too focused on optics. Kaplan and Rosengren may have obeyed the letter of Fed policies with respect to stock trading but they violated their spirit and now they’re gone — within a week of the news breaking. In my book, that’s decisive action and demonstrates yet again that Powell has a pretty good grasp of this fraught moment in which America finds itself.