Will Fed Trading Cost the Central Bank Its Independence?
Should Federal Reserve officials be permitted to trade stocks? That’s a hotly debated topic as an annual financial disclosure of regional Fed presidents revealed questionable trading activities by two officials.
Here’s what we need to understand: As our central bank, the Federal Reserve is in charge of U.S. monetary policies and maintaining the health of the U.S. financial system. It determines critical short-term interest rates and conducts the buying and selling of U.S. Treasury notes and bonds.
Given the Fed’s role in the U.S. monetary system, one could argue Fed officials have “insider” knowledge and could play the stock and bond markets based on insider knowledge of the Fed policies.
It’s for this very reason that the Presidents of the Federal Reserve Banks in Dallas and Boston have come under fire recently—and subsequently taken early retirements. Both Dallas Fed President Robert Kaplan and Boston Fed President Eric Rosengren maintain that they followed the Fed’s ethics roles and didn’t utilize any insider knowledge in their investments.
The investments called into question were Kaplan’s trades in iShares Floating Rate Bond ETF, as well as his trades in individual stocks like Apple (AAPL) and Amazon (AMZN), and Rosengren’s purchase and sales of real estate investment trusts (REITs). Each investment would have been impacted by the central bank’s interest rates policies over the past year.
Kaplan and Rosengren both sold their individual stock holdings by September 30. Both maintained that their trading practices were in line with the Fed’s ethics guidelines, but they sold their assets to show they weren’t using their roles as Fed Presidents for monetary gain.
Fed Chairman Jerome Powell is now conducting a formal ethics review. Powell wants to dig deeper into the Fed’s ethics rules and determine what trading should or should not be permissible by senior Fed officials. Once the review is complete, Powell will reveal his findings and whether policy changes are necessary.
For some, this is all too little, too late.
Senator Elizabeth Warren has been particularly vocal, stating that the senior officials at Federal Reserve banks should not be permitted to own and trade stocks. Warren even mailed letters to all 12 regional Fed banks, requesting each to ban the ownership and trading of individual stocks by senior Fed officials.
In her letters, Warren stated, “I’ve said it before and will say it again: members of Congress and senior government officials should not be allowed to trade or own stocks. Period.” Warren is looking for a response from the regional banks by October 15, and she is calling for the trading ban to be instituted within 60 days.
Others have been critical that the regional Federal Reserve banks are independent, private entities with little to no oversight. These Fed critics call for a restructuring of the central bank to provide more supervision and accountability for the Fed’s decisions and actions.
In our opinion, members of the Fed should be restricted in their trading investments; however, taking away the Federal Reserve’s independence could open a bigger can of worms.
The Federal Reserve was structured as an independent central bank for an excellent reason: it doesn’t receive funding from the U.S. government. Its monetary decisions don’t have to be approved by any branches of the U.S. federal government or even the President. In other words, the Fed’s policy decisions are less likely to be influenced by the political agendas on Capitol Hill.
Without the weight of political expedience, the Fed can set monetary policy looking at the long-term effects of their policies on the U.S. economy, financial system, and the American people. Political oversight would radically change its mission.
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