Amid a veritable whirlwind of macro concerns and all manner of flashy Facebook headlines, the risk of a “disruption” at the Fed may be underappreciated.
Initially, the word “revelations” seemed a bit hyperbolic when it came to discussions about the 2020 trading activities of Robert Kaplan, Eric Rosengren and Richard Clarida. Wealthy people own the vast majority of financial assets in America and post-2008 Fed policy has been a story of asset price inflation.
I’m not entirely sure why anyone was surprised to learn that Fed officials made trades in 2020. Those trades were (as far as we know) consistent with internal guidelines and ethics requirements, and people (all people) routinely misjudge the potential for their own behavior to be viewed unfavorably by others.
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The problem, then, isn’t really the trades. The problem is the optics and, relatedly, the inadequacy of the current framework for preventing the appearance of conflicts. As Jerome Powell put it last month, “clearly [that framework] is not adequate to sustain the public trust.”
I can’t imagine anyone was seriously incredulous — honestly surprised — to learn that Fed officials made trades last year. If you are (surprised I mean) you’re naive. Or at least you were.
Anyway, it seems likely that Kaplan and Rosengren retired in an effort to help ensure the mini-scandal doesn’t put Powell’s reappointment at risk, but at least according to betting markets, it’s not working (figure below).
While Powell will almost surely remain at the helm, those who favor Brainard (if not explicitly, then by default because there simply isn’t another viable candidate) now have an excuse to push the issue.
Elizabeth Warren took her criticism up a notch this week, calling for an SEC inquiry into Powell’s Fed, just days after branding Jay a “dangerous man.”
“Vice Chair Clarida’s trades, in addition to transactions made by two regional Federal Reserve Bank Presidents revealed last month, appear to run afoul of Fed guidelines,” Warren said Monday, adding that,
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. They also reflect atrocious judgement by these officials, and an attitude that personal profiteering is more important than the American people’s confidence in the Fed. Mr. Clarida’s financial disclosures, for example, reveal that he is a multi-millionaire. There is no justifiable ethics or financial rationale for him or any other government official to be involved in these questionable market machinations while having access to non-public information and authority over decisions that have extraordinary impacts on markets and the economy. Finally, and most importantly from the perspective of the SEC, if these trades were based on Fed officials’ knowledge of non-public, market moving information, they may have represented potentially illegal activity.
Warren, love her or otherwise, isn’t to be trifled with. Especially not if you’re a banker, a former banker or, really, anyone with even a loose connection to Wall Street. She lives for these kinds of opportunities and she’ll doubtlessly use this as an excuse to put more pressure on the White House to drop Powell.
To reiterate, it’s highly unlikely that Warren’s pressure campaign will override Janet Yellen’s vote of confidence in Powell. But then again, one wonders if Yellen might be wavering behind the scenes. She has, herself, been the subject of public scrutiny on a few occasions (e.g., the Medley Global incident and criticism around paid speaking engagements between tenures as Fed Chair and Treasury Secretary). It’s possible she won’t want to be seen as implicitly defending conduct which she surely wouldn’t be willing to explicitly endorse.
“Given everything on the Congressional agenda this month, the politicized position of the Fed, worsened by mistakes of its leadership’s own making, is an additional strain on markets,” BNY Mellon’s John Velis wrote, in a Tuesday note called “Meteors” (a reference to Biden’s characterization of a prospective US technical default).
“We believe that Powell would be easily confirmed if renominated, as he has widespread support on both sides of the aisle, Progressive opposition notwithstanding,” Velis went on to say, before noting that “if Powell were not to be renominated, and a nominee more palatable to the Progressives – say, Lael Brainard, for example – were to be named, we think markets would react negatively to this event.”
Perhaps just as important is the idea that Fed officials may be reluctant to say much in the event markets continue to shudder for fear of exacerbating political pressure on Powell or creating the conditions under which the public — prone as it is to conspiracy theories — might suspect more trading is going on.
If the US were to careen over the cliff into a technical default, the situation would be made materially worse.
It is a tail risk for the short term. Volatility often goes up when you get a new Fed chair- first of all the market is uncertain about what that portends- secondly there is usually a learning curve for a Fed chair- often it coincides iwth a market test within 6 months. Would be surprised if Powell was not reappointed but as you say it is possible. More likely Ms. Brainard will be the new Fed chair in 4 years if Biden is in the chair. If not, she may be the new US Treasury Secretary when/if Yellen moves on in a few years.
Appreciate the comment. I’ve previously commented to H that Powell should not get another term. But “Fed time” moves in extremely slow blinks. And as you note, the current state is not without discomfort. That said, Brainard is a rising presence.
Just one more reason why volatility in the month of October notches up (historically). Govt funding, passing budgets (or not), lead-ups to elections (October surprises), year-end deadlines approaching, Q3 earnings… all conspiring to kick up some dust in one measly month.
And, at least at the headlines level, it’s always about the ‘market’ first when talking about the Fed. Inflation and employment are now represented by the market, other statistics be damned.
“routinely misjudge the potential for their own behavior to be viewed unfavorably by others.” I felt that
I think I’ve posted this before, but mostly I expect the result to be a “dovish” pivot from Jay with commitments to Progressive Fed agenda items as the offering for his re-appointment.
It used to be that there were only a few outright crooks and blatant liars in government but now it appears that easily a majority of officeholders and agency bosses at all levels of government are a bunch of liars on the take. When I mail my 1040ES checks to two governments it makes me furious every time.
I feel the same way about my real estate taxes. The collections in my “little mountain town” has resulted in a boondoggle of real estate developments that we do not need.
However, since removing organized religions, the Boy Scouts of America, schools built in Asia (see Three Cups of Tea scandal) among others from my list of potential charities that I would consider, the US government seems as good as any.
Too bad I can’t get a Schedule A deduction for Federal taxes paid (haha).