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The trading activity of two former top Federal Reserve officials created an “appearance of conflict of interest” with their duties as US monetary policymakers, although they were cleared of any unlawful activity, according to a report by the central bank’s watchdog.
The Office of Inspector General, which oversees the Fed, said in a report released on Monday that the two former regional Fed presidents — Robert Kaplan of the Dallas Fed and Eric Rosengren of Boston — had traded securities in a way that could “cause a reasonable person to question” their “impartiality” under their respective institutions’ codes of conduct.
Both men, who sat on the rate-setting Federal Open Market Committee, were cleared of any legal wrongdoing by the probe, which has taken more than two years to reach its conclusion.
The report brings to a close one of the most damaging controversies of Jay Powell’s tenure as Fed chair, which sparked criticism that officials at the central bank were personally gaining from their response to the Covid-19 pandemic.
Kaplan and Rosengren resigned within hours of one another in September 2021, weeks after Powell announced that the central bank was launching an ethics review into rules governing officials’ trading activity. Richard Clarida, a former vice-chair on the Fed, also resigned after he was embroiled in the scandal. He was later cleared of any wrongdoing, as was Powell himself.
The inspector general’s report said the rules during the time covered by the investigation “did not sufficiently support public confidence in the impartiality and integrity of the policymakers and senior staff carrying out the public mission of the FOMC’s work”.
New rules came into effect in May 2022.
Kaplan, who was president of the Dallas Fed for six years, was not found to have “violated laws, rules, regulations or policies related to trading activities”. However, in a financial disclosure made in 2020 — when he was a voting member of the Federal Open Market Committee and the Fed was cutting rates and injecting trillions of dollars into the economy as part of its response to the pandemic — he did not publicly list specific dates of trading activities or specify transactions that involved selling stock option contracts, the report said.
“This lack of information, in our opinion, did not support public confidence in the impartiality and integrity of the policymakers and senior staff carrying out the public mission of the FOMC’s work, especially during this critical time period when the Federal Reserve was taking monetary policy actions to address the effects of the COVID-19 pandemic on the US economy,” the report said.
Kaplan disclosed that he held investments worth $1mn or more in 27 listed companies.
Rosengren, who left the Boston Fed after a three-decade career at the central bank, did not report “multiple trades” on his 2020 disclosures, the investigation found. The report also “found multiple discrepancies between the transactions reflected in his brokerage statements and trading data and what he reported”.
The investigation also took issue with Rosengren’s trading in real estate investment trusts “during a time of financial market volatility that prompted the Federal Reserve to authorise the purchase of agency mortgage-backed securities”.
