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Powell orders ethics review after Fed presidents disclosed multimillion-dollar investments

Federal Reserve Chairman Jerome Powell directed staff to review the central bank’s ethics rules for appropriate financial activities after disclosures that several senior central bank official made multiple multimillion-dollar stock trades in 2020, while others held significant investments.

News of Powell’s inquiry broke after Sen. Elizabeth Warren sent 12 letters to the Fed’s regional bank presidents demanding stricter ethics from the nation’s top central bank officials.

The Massachusetts Democrat called on each Fed president to institute a ban on the ownership and trading of individual stocks by senior officials at each regional office.

Last week, financial disclosures filed by the Fed’s 12 regional presidents revealed some had activity traded in 2020, while others held million-dollar financial positions without making changes to their portfolios.

A Fed spokesman told CNBC that Powell last week ordered a “fresh and comprehensive look at the ethics rules around permissible financial holdings and activities by senior Fed officials.”

Powell ordered the review “because the trust of the American people is essential for the Federal Reserve to effectively carry out our important mission,” the spokesman said. “This review will assist in identifying ways to further tighten those rules and standards. The Board will make changes, as appropriate, and any changes will be added to the Reserve Bank Code of Conduct.”

Documents released last week revealed that Dallas Fed President Robert Kaplan made multiple trades worth $1 million or more last year in individual stocks including Apple, Amazon and Delta Airlines.

Boston Fed President Eric Rosengren held stakes in four real estate investment trusts and several purchases and sales of similar property-owning vehicles, according to filings. He also held stock in Pfizer, Chevron and AT&T. His investments were in the tens to hundreds of thousands of dollars.

Other Fed president, such as Richmond Fed President Thomas Barkin, disclosed little to no trading activity but several financial holdings in excess of $1 million.

His stakes included Coca-Cola stock worth more than $500,000 but less than $1 million. Barkin’s largest holdings, worth $1 million or more, included a variety of exchange-traded and mutual funds overseen by outside managers.

He had, for example, a holdings worth at least $1 million in Vanguard’s Energy Fund Admiral Shares, a mutual fund that invests in energy companies including ConocoPhillips, Marathon Petroleum Corp and BP.

Even the appearance of self-dealing at the Fed could prove problematic to an institution tasked with the impartial oversight of U.S. employment and inflation.

The trades quickly came under scrutiny given the Fed’s critical role in managing the U.S. economy as well as its influence over interest rates and liquidity markets.

The Covid-19 pandemic and ensuing recession magnified the Fed’s power in 2020. Congress allows the Fed, with the Treasury Department’s approval, to embark on a wide range of emergency lending measures to flush the economy with cash during times of emergency.

Rosengren, Barkin and Kaplan serve as presidents of three of the Fed’s 12 regional banks that span the country. The regional bank presidents take turns serving on the Federal Open Market Committee, the Fed’s policymaking body that sets interest rates across the economy.

Amid the public backlash, both Kaplan and Rosengren have agreed to sell their individual stock holdings.

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Warren sent letters to all the Fed’s regional bank presidents demanding tighter restrictions on the type of financial activity officials can engage in.

Each letter, all dated Sept. 15, was similar to the next except for the two addressed to Kaplan and Rosengren.

“As the Fed took extraordinary actions to address the risks to the economy and the banking and financial systems from the COVID-19 pandemic, you and your colleague Eric Rosengren made extensive trades in individual stocks and real estate investment trusts,” Warren wrote in her letter to Kaplan.

That trading, she added, “has prompted concerns about conflicts of interest among high-level officials with far-reaching policymaking influence and extraordinary access to information about the economy.”

The Fed played a leading role in the U.S. economic recovery from the worst of the coronavirus recession.

Economists say its political independence allowed it to move quicker than Congress and that its monthly purchase of $120 billion in U.S. debt and mortgage-backed securities helped sustain countless businesses that saw business swoon last year.

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