The Federal Reserve’s ethics scandal is not resolved

The Federal Reserve’s reputation has been severely damaged by revelations that top Fed officials routinely ignored their own code of ethical conduct and that some officials may have broken the law. While the Fed has taken some positive steps in recent weeks, this scandal is still far from being resolved.

The Fed’s newly-announced ethics rules remain grossly inadequate. Fed Chair Jerome Powell has not provided sufficient clarity about his own financial transactions. And the Fed is still not following its own rules about engaging law enforcement agencies whenever criminal statutes may have been broken. 

Every federal official is strictly prohibited from using nonpublic information for personal gain, but this statute has distinctive implications for Federal Reserve officials. In particular, the Fed’s monetary policy actions have broad effects on financial markets, not just individual companies.

Moreover, the Fed’s leadership often formulates its policy plans over an extensive horizon, and key aspects of those plans may remain confidential for many months. For example, in one previous Fed scandal, a Wall Street analyst sent a newsletter to clients in early October 2012 entitled “December Bound” that disclosed the Fed leadership’s plans for the December 2012 monetary policy meeting even though those plans hadn’t yet been discussed with the full committee, much less the general public. 

Thus, while prohibitions on owning stocks of specific companies may be a sensible restriction for many other public agencies, such rules are practically irrelevant for Federal Reserve officials, who could easily garner profits by investing in broad market indexes. Furthermore, a 45-day waiting period is simply too short to ensure that Fed officials do not profit from nonpublic information. To restore public confidence, the Federal Reserve must move promptly to require all top Fed officials to hold their financial assets in qualified blind trusts throughout their tenure in office. 

As the sole executive officer on the Fed’s Board of Governors, the chair has a unique role in determining its agenda, executing its policies and serving as role model for other Fed officials and staff. Unfortunately, Chair Powell’s financial disclosure forms over the past several years have been far more opaque and troubling than those of any other current member of the Fed’s Board of Governors.

For example, Powell’s disclosure form for calendar year 2019 refers to very large quantities of securities transactions – both purchases and sales — using the notation “Multiple” rather than disclosing the specific date of each transaction. No other current Fed Board member has used that notation on any of their financial disclosure forms. In fact, the only president of a regional Federal Reserve Bank who followed such a practice was Robert Kaplan, who recently resigned from his position as president of the Dallas Fed.

Powell’s financial disclosures are also opaque about his personal role in managing the Powell Family Trusts. Given that those funds are not qualified blind trusts, it is troubling that large transactions were made around the time of monetary policy meetings, even though such transactions were strictly prohibited by the Fed’s Code of Conduct.

The reputational damage of this scandal has been magnified by the Fed’s failure to follow its own policy in responding to recent revelations. In particular, the Fed must promptly request law enforcement agencies to join the Fed’s inspector general in investigating whether any laws were broken. The involvement of law enforcement agencies is crucial to avoid potential conflicts of interest in carrying out this investigation. After all, the Federal Reserve’s inspector general is merely an employee who reports directly to the Fed’s chair and who can be terminated by a vote of the Fed’s board. Thus, a credible and swift investigation requires active cooperation with the Securities and Exchange Commission and the Department of Justice.

Indeed, the Federal Reserve should welcome non-partisan congressional legislation to strengthen public confidence in the Fed’s ethics and integrity. The Fed’s inspector general should become a fully independent official, appointed by the president and confirmed by the U.S. Senate, just like at all other major federal agencies. In combination with the actions noted above, this measure will help restore the Fed’s reputation and bolster its effectiveness in carrying out its crucial mission as America’s central bank.

Andrew Levin is a professor of economics at Dartmouth College who previously served as a special adviser on monetary policy strategy and communication at the Federal Reserve Board.