There's something rotten in the Fed

Editorial | Mary Ma 20 Oct 2021

If Jerome Powell was still likely to be

reappointed a month ago to lead the Federal Reserve after his term ends in February, it is less likely now that the organization has been rocked by a string of scandals involving high-placed officials cashing in on stocks at sensitive moments.

Powell happens to be one of them.

So far, two Fed officials have quit after their dubious acts were exposed by the media.

Facing the backlash, Dallas Fed president Robert Kaplan and Boston Fed president Eric Rosengren resigned last month.

A third, Fed vice chairman Richard Clarida, also traded out of a bond fund into stock funds a day before Powell issued a statement on potential policy action.

Clarida remains in office and a Fed spokesman said his action was a pre-planned rebalancing to his accounts, similar to a rebalancing he did in 2019. On both occasions, Clarida had declared accordingly.

The incidents remind us of the importance of having a free media carrying out investigative journalism to keep the public informed.

The Hong Kong Monetary Authority apparently does not face a similar issue, maybe due to the extremely lucrative employment packages accorded to its senior executives.

For example, the HKMA chief executive is one of the highest paid central bankers in the world.

Back in the US, four top Fed officials Including Powell have been involved in the scandals.

According to The American Prospect, Powell sold up to US$5 million (HK$39 million) worth of stock options just before the Dow Jones tanked last year. He made the stock sales on October 1 as stimulus talks between Trump and Congress broke down. The Dow Jones dived six percent that month.

It may be true that the sales made by those officials took place outside the blackout period, but they likely went against some of the Fed's conduct codes.

These require its senior officials to avoid engaging in any financial transaction, the timing of which could create the appearance of acting on inside information concerning Fed deliberations and actions.

They are also required to avoid any dealings that might convey even an appearance of conflict between their personal interests, the interests of the system and the public interest.

Ask any Americans, including senator Elizabeth Warren, and most would agree the incidents raised eyebrows. The dealings as reported have generated at least a perception of probable conflicts of interest - even if not to the more serious extent of insider trading.

How can this not be outrageous?

Of the world's numerous central banks, the Fed is undoubtedly the most powerful and it is scary to think those at the helm can be as questionable as any other investors.

But, unlike other investors, their decisions move markets and government policies.

Though less powerful than his American counterpart when he was still HKMA chief, Joseph Yam Chi-kwong once shared a secret with the media that he bought neither stocks nor real estate to avoid creating exactly such a perception.

Warren, a Powell opponent, has found more reasons to persuade other lawmakers to join her in opposing his confirmation if he is nominated.

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