ROBERT KAPLAN had a year 2020. As a voting member of the Federal Reserve’s monetary policy committee, he participated in its decisions to step up stimulus measures. As head of the Dallas Fed, he has made two dozen public appearances, speaking at chambers of commerce, think tanks and conferences. And as a wealthy individual, he traded millions of dollars in stocks in companies from Apple to Chevron.
On September 27, amid growing questions about the merits of such activity for a Fed official, Kaplan announced his resignation. The focus on its trading, revealed in its annual financial communication, risked becoming a distraction for the central bank, he said.
He was not alone. Eric Rosengren, chairman of the Boston Fed, resigned the same day, under the same cloud. His transactions were less onerous than Mr. Kaplan’s, with most of his orders valued at less than $ 50,000. But he had invested in trusts that held mortgage-backed securities around the same time the Fed was buying such assets. Mr Rosengren said he was stepping down for health reasons.
At a press conference on September 22, Jerome Powell, the chairman of the Fed, expressed his displeasure but did not blame his two colleagues. Their investments had been judged to comply with the rules of the Fed by the ethics officers. They did not, for example, buy shares in banks supervised by the central bank. And they didn’t trade in a ten-day window before the rate-setting meetings.
It was also not the first time that Fed officials, many of whom have a background in finance, disclosed large investments. Critics never liked it that much. But the Fed’s outsized role in the markets in response to the covid-19 pandemic has forced the problem. At best, active trading seems inappropriate for central bankers charged with protecting the economy. At worst, one wonders if Fed officials could benefit from private information or if their personal portfolios could influence their political thinking.
Other central banks could face similar dilemmas. The Bank of Canada, for example, allows employees to invest in a wide range of assets, restricting only top-level staff to owning stocks in financial companies. The Bank of England is also relaxed, although it does require its staff to obtain approval before trading in securities. The Fed, no doubt, is already more responsible: the commercial activities of MM. Kaplan and Rosengren have been self-declared in their annual statements, made available to reporters via email.
Mr Powell promised that the Fed would tighten its ethics rules after a thorough review. Yet it is difficult to see how to avoid the emergence of conflicts of interest with just about any investment. As Mr Powell said, he had owned municipal bonds for years, in part because they were seen as a safe asset for Fed officials as the central bank was not likely to buy them. But last year he helped the Fed save the municipal market when it was under strain. Blind trusts, invested in a wide range of index funds and asset classes, might be the best solution. Any self-respecting central banker should also be aware that such passive strategies are, on average, likely to outperform active portfolio management. â
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This article appeared in the Finance and Economics section of the print edition under the headline “Set Rates and Negotiate Them Too”