Trading scandal that rocked US Fed offers chance to reshape it

WASHINGTON (BLOOMBERG) – The resignation of two Federal Reserve chiefs amid a stock-trading scandal means an unexpected number of top monetary-policy jobs are coming up for grabs – and there’ll likely be an unusually intense spotlight on who fills them.

Eric Rosengren and Robert Kaplan, presidents of the Fed branches in Boston and Dallas, announced their retirement on Monday (Sept 27) following disclosures about their trading activity last year.

Both Mr Kaplan and Mr Rosengren have come under criticism in the past few weeks after their 2020 financial disclosures, released recently, showed they held and traded financial assets while the Fed was actively supporting markets through the pandemic crisis. The disclosures brought widespread criticism of potential conflicts of interest.

Mr Kaplan conducted multiple US$1 million-plus transactions last year. Both Fed chiefs said earlier this month that they would sell all individual stock holdings by Sept 30, even though they cleared Fed rules and ethical guidelines.

The episode embarrassed the Fed, which is trying to persuade the public that it cares about Main Street even as its policies enrich asset holders.

It also leaves six seats on its 19-member Federal Open Market Committee (FOMC) that could be filled in the coming months, at a time when the US central bank is under pressure to make its top ranks more diverse – and also split over the outlook for monetary policy.

As they seek to defuse the former criticism, the bank’s leadership in Washington is likely to grab more influence over new appointments at the regional banks, whose own boards may end up getting sidelined, Fed-watchers say.

‘A wider range’

There’s “an opportunity for the Fed’s Board of Governors to initiate a more open and transparent process” for selecting Fed presidents, said Andrew Levin, a Dartmouth College economist and former Fed Board senior staff member. “Serious consideration should be given to a wide range of candidates, not just longtime Fed insiders or those with close ties to finance and wealth management.”

Raphael Bostic, the Atlanta Fed chief, became the first Black regional president in 2017, more than 100 years after the system’s establishment in 1913. Among the 12 current regional presidents, just three are women. Along with its racial and gender makeup, the FOMC’s policy inclination could shift too. Right now, it’s finely balanced.

In its most recent set of projections, the committee was evenly split between those who expect rates to stay near zero through the end of next year – to bolster growth and employment – and those who expect at least one hike before the end of 2022, to counter a spike in inflation as the economy reopens.

The departing Mr Rosengren is viewed as moderately hawkish – as are Richard Clarida and Randal Quarles, two vice chairs of the Fed whose terms are due to end in the coming months. Their replacements could swing the committee in favor of officials who would like to take their time in tightening policy. Chair Jerome Powell’s term is also due to end in February. President Joe Biden hasn’t indicated whether he’ll reappoint him and a decision is expected this fall.

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