Federal Reserve chair Jerome Powell. Picture: AL DRAGO/REUTERS
Federal Reserve chair Jerome Powell. Picture: AL DRAGO/REUTERS

The Federal Reserve will ban policymakers and other senior officials from buying individual stocks and bonds and will also restrict active trading after an ethics scandal led to the departure of two regional presidents and risked confidence in the central bank.

“These tough new rules raise the bar high in order to assure the public we serve that all of our senior officials maintain a single-minded focus on the public mission of the Federal Reserve,” Fed chair Jerome Powell said in the statement.

The Fed has been under fire for embarrassing revelations over trading in 2020 by a few top policymakers as the central bank aggressively fought to protect the economy from Covid-19.

The disclosures have been used as ammunition by critics of Powell who oppose his renomination as Fed chair when his tenure ends in February and have prompted calls in Congress for an investigation. Senator Elizabeth Warren has asked the Securities Exchange Commission (SEC) to look into whether any insider trading rules were breached.

Under the new policies, senior Fed officials — including regional bank presidents, Washington governors and senior staff — will be limited to purchasing diversified investment vehicles such as mutual funds, the central bank said in a statement on Thursday.

New appointees will have to divest certain assets before joining, like a portfolio of individual corporate bonds, for example, a Fed official said on a briefing call with reporters.

Other rules “to help guard against even the appearance of any conflict of interest in the timing of investment decisions” include providing 45 days’ advance notice for buying and selling securities, obtaining prior approval for such transactions and holding investments for at least one year. Additionally, “no purchases or sales will be allowed during periods of heightened financial market stress”, the Fed said.

The 12 regional Fed presidents will be required to publicly disclose financial transactions within 30 days, a policy that already applies to Washington-based governors and senior staff, the Fed said. They previously were only required to do so on an annual basis. Reports will be made public on the Fed’s website.

The announcement comes after Powell ordered a system-wide review of ethics rules and also asked the Fed inspector-general to take a look at the trading of “certain senior officials”.

Warren, in her request to the SEC, cited a Bloomberg News report on October 1 that Fed vice-chair Richard Clarida’s 2020 financial disclosures show he traded between $1m and $5m out of a bond fund into stock funds one day before Powell issued a statement flagging possible policy action as the pandemic worsened.

Dallas Fed president Robert Kaplan and Boston’s Eric Rosengren both stepped down following revelations of unusual trading during 2020. Rosengren cited a chronic illness in announcing his early retirement.

The new rules will supplement those already in place, such as a 10-day trading blackout around Fed meetings, according to the Fed official on the call.

Bloomberg News. More stories like this are available on bloomberg.com


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