Eric Rosengren, president of the Federal Reserve Bank of Boston said that he would resign this week due to health reasons. Robert Kaplan, president of the Dallas Fed said that he would step down Oct. 8 in order to not become a distraction from the Fed's larger mission.
After revealing extensive stock trading in 2020, the Fed spent trillions of dollars stabilizing financial markets. Government watchdogs were critical of the financial disclosures. The Fed's actions could have been profitable for the two officials due to their trading.
Although Rosengren and Kaplan's investments were allowed by the Fed, they created at least the appearance that conflicts of interest. Fed policy discourages this. Senator Elizabeth Warren, a Massachusetts Democrat criticized the trades strongly and demanded that Fed officials ban stock ownership.
Jerome Powell , Fed Chair, will testify before the Senate Banking, Housing and Urban Affairs Committee on Tuesday. Warren will also be present and likely to face questions about the Fed's ethics regulations. According to observers, Powell will have a concrete answer if he is asked about the Fed's ethics rules after his resignations.
Krishna Guha, analyst at Evercore ISI, stated that the departure of Rosengren, Kaplan and Kaplan will ease the pressure on Powell who, notably, failed to express confidence in them at a press conference last week.
The Fed's private policymaking meetings include the participation of the presidents of 12 regional banks. They discuss the central bank’s interest-rate policies, and have access to economic data that is not available to the general public. Sharp swings in financial markets can be caused by Fed decisions. The same goes for comments and speeches by the presidents to the media.
Last week, Fed Chair Jerome Powell stated that the Fed would alter its ethics policies following the disclosures. The Fed could still be under pressure to open an investigation by outsiders into whether or not the Fed traded on the basis of inside information.
Jeff Hauser, director at the Revolving Door Project (a non-profit group that monitors government appointments), stated, "After this egregious violation of public trust, nothing except a thorough investigation and a referral the (Securities and Exchange Commission] is acceptable."
Kaplan executed trades in excess of $1 million last year in 22 stocks or index funds. These included Amazon, Chevron and Facebook.
Rosengren had previously invested in funds that held mortgage-backed bonds. This is the same type of bond that the Fed bought hundreds of billions of dollars worth this year.
Rosengren stated that he was eligible for a kidney donation last year and that the stress of working at Fed during the recession caused him to lose his health.
He stated, "It is clear that I should aim for stress reduction so that I can concentrate on my health issues."
Although Rosengren and Kaplan weren't voting members of this year's Fed policymaking committee, they did contribute to the forecasts of the Feds interest rate policy. last week indicated that the Fed might increase its short-term rate from nearly zero by 2022. This was a change from June when Fed projections didn't show any increase until 2023.
Both are considered "hawkish" policymakers. This means that they favor higher interest rates to combat inflation.
According to Powell's financial disclosures, he owns municipal bonds in 2020. However, the Fed purchased these bonds last year for the first time in an effort to stabilize the market. Powell, who was previously a private equity executive, stated last week that he owned munis since years. He also cleared his ownership with the Office of Government Ethics.
Powell spoke at last week's press conference about a reason these ethics concerns flared. Previously, municipal bonds were considered a safe asset that Fed officials could own because they weren't bought or sold by the Fed. Last year, however, it began to buy corporate bonds.
As acting president and CEO, Kenneth C. Montgomery (Boston Fed's first vice-president) will be in charge. Meredith Black, Dallas Fed First Vice President, will take over as interim president.
The six bankers who are not bankers are responsible for selecting the Fed regional bank presidents. Participation by directors who are bankers affiliated is prohibited.