After revelations of several scandals involving potential insider trading within the Federal Reserve have emerged over the past weeks, the agency has banned its officials from trading individual stocks as it scrambles to mitigate a legitimacy crisis and distrust of the public.
Policymakers and senior staff within the Fed are now barred from buying individual securities and will have to adhere to shorter reporting guidelines, according to a press release by the agency. Senior Fed officials will only be allowed to trade diversified assets like mutual funds.
However, the kind of scandal that likely sparked the new rules would still be likely to take place. Last week, The American Prospect revealed that Fed Chair Jerome Powell sold between $1 million and $5 million from an index fund — a mutual fund that mirrors the performance of the market — just before a large market crash in October of last year. And with rules still allowing top officials to trade mutual funds, the type of trade that precipitated the rule change would still be legal.
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Progressive lawmakers and economists have called for Powell to be ousted from the Fed, saying that he’s weak on climate issues and regulation of the financial sector. Economist Gerald Epstein wrote for Truthout that Powell’s financial regime and de-regulation moves have likely exacerbated financial inequality and weakened economic growth that would support the working class.
Criticizing the Fed’s pandemic policies that gave preference to bailing out markets over small governments and businesses, Epstein wrote: “In the absence of a strong commitment to financial regulation and the will to enforce it, this destructive cycle of speculative excesses, financial crises and bailouts is simply going to continue.”
“These tough new rules raise the bar high in order to assure the public we serve that all of our senior officials maintain a single-minded focus on the public mission of the Federal Reserve,” Powell said in a statement last week.
The Fed has also been embroiled in several other scandals. Last month, two regional Fed presidents were found to have traded significant amounts of stocks in 2020 as the markets were roiled by the pandemic. Dallas Fed President Robert S. Kaplan had made nearly two dozen stock trades worth $1 million or more. Boston Fed President Eric S. Rosengren bought and sold real-estate related securities, which are related to Fed policy. Both officials have since resigned.
Then, earlier this month, reports showed that the Fed’s vice chair, Richard Clarida, had moved between $1 million and $5 million in stocks in February of 2020, the day before Powell announced potential policy overhauls for the pandemic. Clarida is still in his position.
These scandals happened despite a warning circulated to Fed officials in late March of last year warning officials that active trading during the financial crisis would reflect poorly on the agency. Indeed, the New York Times has reported that most regional presidents and Fed governors didn’t trade in April.
The latest Federal Reserve data has shown, meanwhile, that stock trading is a financial tool that is increasingly available only to the richest individuals in the U.S. Data last week showed that the wealthiest 10 percent of Americans own a record 89 percent of all individual stocks. This has aided the accumulation of wealth at the top during the pandemic, during which the top 1 percent gained more than $6.5 trillion in corporate equities and mutual fund assets.
The Fed’s top officials, who have huge sway over financial markets in the country, are representative of some of these top wealthiest individuals in the country. The five appointed members of the Fed, including Powell and Clarida, are all millionaires. Powell, worth between $20 million and $55 million, is the richest Fed chair in history.
After Clarida’s trade was reported, Sen. Elizabeth Warren (D-Massachusetts) called for an insider trading probe at the Fed, saying that it shows “atrocious judgment” and erodes confidence in the Fed. She has been extremely critical of Powell as President Joe Biden considers reappointing the Fed president, calling him a “failed” leader and a “dangerous man” to lead the agency.
Last week, after the new rules were announced, Warren said that the overhaul was merely the bare minimum. “Of course Fed officials shouldn’t trade individual stocks — it should be illegal,” she wrote. “But Fed officials must avoid actual and perceived financial conflicts, period. We need full transparency on the behavior that’s led us here [and] assurances these new policies will fix what’s broken.”
“There can be no reform without accountability. That means disclosure of all trades to this point by Fed officials,” Warren continued. She called on the Inspector General and the Securities and Exchange Commission to investigate the stock trades.
Warren also called on the agency to release the warning handed to Fed officials last year “so that Congress and the public can evaluate the extent to which Fed officials may have known of the risks from their trading, and if they ignored calls by ethics officials to avoid this scandalous behavior,” she said.
The scandals at the Fed have also prompted lawmakers to advocate for barring Congress and other top officials and lawmakers from being able to trade stocks. In response to the rules barring Fed officials from trading stocks, Rep. Pramila Jayapal (D-Washington) wrote, “Now let’s do members of Congress.”
Earlier this year, Warren introduced legislation that would bar top officials from trading stocks, seeking to root out corruption within the federal government. The chances of passing such legislation through Congress, however, are slim to none as members from both sides of the aisle profit greatly from stock trading.