“[W]e did not find evidence to substantiate the allegations that former Vice Chair Clarida or you violated laws, rules, regulations, or policies related to trading activities as investigated by our office,” the OIG wrote in a letter to Powell.
The much-anticipated report drew swift criticism from watchdog groups, Fed experts and lawmakers who said the findings were too vague and restored little confidence that officials might be penalized for any financial wrongdoings.
Sen. Elizabeth Warren (D-Mass.), who sits on the Senate Banking Committee and has called for heightened Fed ethics rules, tweeted, “This behavior by top economic policymakers shouldn’t be swept under the rug.”
“We need accountability and stronger ethics rules to end conflicts of interest at the Fed,” she wrote.
In the report, the Fed’s OIG outlined how a financial adviser working on behalf of a Powell family trust executed five trades in December 2019 during what is known as the “blackout period,” when Fed officials are barred from a range of financial activities. The report made clear the trades were precipitated after Powell’s wife asked to make funds available for the purpose of charitable donations at the end of the year.
The financial adviser later acknowledged that the execution and timing of the trades were an “oversight,” and as a result, the OIG did not rule that Powell or his family members violated laws or regulations.
The report comes nine months after the Fed’s inspector general began investigating whether trading activity by the central bank’s top officials complied with ethics rules and the law. The investigation is still working on its review of the activities of two other former Fed officials: Eric Rosengren, who led the Boston Fed, and Robert Kaplan, who led the Dallas Fed. Both announced their resignations in September.
The ethics scandal and its fallout are playing out as the Fed battles other major problems in the economy. On Wednesday, new inflation data showed prices soared by 9.1 percent in June compared with the year before, extending another peak and giving the Fed no comfort that its policies are bringing inflation down. As a result, the Fed’s paths to avoiding a recession are getting narrower as the American public sours on the economy and faces high prices for groceries, gas, rent and everything in between.
Scrutiny over Clarida’s trading activity began in October after Bloomberg News reported that he bought shares in February 2020 of an investment fund that held stocks. That move occurred just before the Fed announced it was prepared to help the economy as the pandemic began to take hold, restoring confidence to the markets.
Attention on Clarida’s trades intensified months later after the New York Times reported that he failed to disclose the full extent of his trading. Months after his initial disclosures, Clarida corrected his public records, showing that he moved money out of a stock fund as the coronavirus spread and the markets fell. Then three days later, after the markets plunged, Clarida moved money back into the same fund, just before the Fed announced it was prepared to step in and provide new economic supports to the financial system.
“In the end, the OIG determined conclusively that I did not violate any statutes, rules, regulations, or standards,” Clarida said in a statement Thursday. “I have always been committed to conducting myself with integrity and respect for the obligations of public service, and this report reaffirms that lifelong commitment to exceeding ethical standards.”
Experts have more questions about the ongoing investigations and said the pressure on Fed officials to uphold the highest standards, even beyond the bounds of the law, should remain high.
“With regard to the specific accusations and questions, the facts are not in dispute,” said Aaron Klein, a senior fellow in economic studies at the Brookings Institution. “Clarida made trades and forgot to report them. Powell had this trust that made trades during the blackout period. I think what’s more concerning is where’s the findings for the Fed senior staff? And where are the findings for the Fed regional bank presidents?”
Dennis Kelleher, president and chief executive of Better Markets, which advocates stronger market regulation, said the investigation was “very narrow, omits key information, and is not credible.” Kelleher argued the investigation was never truly independent of the Fed, because the central bank’s inspector general is hired by the chair and ultimately reports to him.
“A person like the Chair asking a subordinate like the IG to investigate his boss is simply not credible, particularly, where, as here, the boss has already repeatedly stated publicly that no laws or rules were broken,” Kelleher said in a statement. “An after-the-fact investigation by the subordinate concluding that the boss’ prior public statements were accurate is not a credible investigation.”
Kaplan’s trading activity included 27 individual stocks, funds or alternative asset holdings, each valued at more than $1 million. Rosengren’s trading activities were on a much smaller scale but included stakes in four real estate investment trusts, at a time when Rosengren was publicly raising concerns for the commercial real estate sector. His public speeches and remarks often highlighted his concerns for the commercial real estate sector as the economy weathered the coronavirus recession.
The scandal also ramped up the pressure on Powell to overhaul the Fed’s internal policies about what kind of financial activities officials can and can’t participate in. The Fed’s own reputation also suffered, leaving Powell to make the case to the American public and Congress that the central bank was worthy of the public’s trust.
As part of its cleanup act, the Fed announced a major tightening of its ethics rules, which now prohibit the purchase of individual securities, restrict active trading and ramp up the timeliness of reporting and public financial disclosures by Fed policymakers and senior staff members. Senior Fed officials are also only allowed to purchase diversified investment vehicles, such as mutual funds.
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