Fed ethics under the microscope

From: POLITICO's Morning Money - Friday Sep 17,2021 12:03 pm

Sep 17, 2021

By Victoria Guida and Aubree Eliza Weaver

Presented by The 1031 Impact Coalition

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Quick Fix

Fed ethics under the microscope — Federal Reserve Chair Jerome Powell is launching a review of the central bank’s ethics rules in the wake of revelations that two policymakers traded stocks and real-estate assets last year, while the Fed was engaged in an extensive rescue of financial markets. The episode not only raises questions about what types of assets central bankers should be allowed to invest in, but also once again thrusts into the spotlight the oddity of the Fed’s regional branches and their legal status.

Dallas Fed President Robert Kaplan and Boston Fed President Eric Rosengren , the two officials at the center of the controversy, have already agreed to sell the assets by the end of September and put the proceeds in index funds or savings. But the entire thing underscores that regional Fed presidents are not required to disclose their financial trades to the Office of Government Ethics, unlike members of the Fed’s Washington-based board, because they’re quasi-private institutions.

The trades apparently complied with internal Fed ethics guidelines , and a Fed board spokesperson said the “core rules” around financial practices by central bank officials are the same as for other government agencies. “We also have a set of supplemental rules that are stricter than those that apply to Congress and other agencies that are specific to the work we do at the Federal Reserve,” the spokesperson said. But there are calls by some, notably Sen. Elizabeth Warren, to go further and ban trading in individual stocks by Fed policymakers altogether.

Former Fed Vice Chair Don Kohn in an email to MM called Powell’s move to review ethics rules “appropriate and necessary.”

“Public trust and confidence that the Fed is acting in the public interest is essential to maintaining support for the actions it takes to fulfil its mission—and therefore to its success,” he said. “The financial activities—the active trading—of those two presidents, as described in the press, risked that public trust and confidence and should not be allowed. … The hybrid nature of the System—the unique character of the reserve bank presidents, appointed by and serving under private boards of directors, in public policy—makes it all the more important that their activities be above suspicion.”

Meanwhile, the Revolving Door Project — an advocacy group that’s strongly opposed to Powell’s reappointment — is pressing for more, calling for Kaplan and Rosengren to be placed on an administrative leave while their trades are investigated fully. (The Fed declined to comment on the letter.)

TGIF — Ben White will be back next week! Send tips to him at bwhite@politico.com or @morningmoneyben and to Aubree Eliza Weaver at aweaver@politico.com or @AubreeEWeaver. And you can always reach me with any economic policy tips at vguida@politico.com.

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Driving the Day

FHFA DRAMA — House Financial Services Chair Maxine Waters late Thursday night threw a wrench in White House plans to nominate consumer watchdog Michael Calhoun as director of the Federal Housing Finance Agency, calling instead for Acting FHFA Director Sandra Thompson to be tapped for the position formally. “As Congress and the Biden Administration work to pass the Build Back Better Act, it will be critical to have an FHFA Director who is committed to advancing housing affordability, expanding the dream of homeownership, and closing the racial wealth gap in this country,” Waters said in a press release. “Appointed on June 23 as acting director, Ms. Thompson has needed little time to show this nation how uniquely qualified she is to serve at the helm of FHFA.”

K STREET COUNTING ON SENATE TO PARE BACK DEM TAX PLANS — Our Caitlin Oprysko: “Business lobbyists have described House Democrats’ ambitious new tax plan as an “existential threat,” but for all the dire warnings, K Street isn’t freaking out — yet. In interviews this week, lobbyists representing a range of business interests said they aren’t too worried about the party’s opening salvo on tax increases, confident the bill — and the threats their clients insist it poses — will be pared back in order to thread its way through a narrowly divided House and Senate.

“‘This is the beginning of the process,’ said Arshi Siddiqui, a partner at one of Washington’s top lobbying firms, Akin Gump Strauss Hauer & Feld, and a former aide to House Speaker Nancy Pelosi. ‘We are talking about landmark legislation and a legislative centerpiece for the Biden administration.’”

WORLD BANK CANCELS FLAGSHIP ‘DOING BUSINESS’ REPORT — WSJ’s Josh Zumbrun: “The World Bank canceled a prominent report rating the business environment of the world’s countries after an investigation concluded that senior bank management pressured staff to alter data affecting the ranking of China and other nations. The leaders implicated include then World Bank Chief Executive Kristalina Georgieva, now managing director of the International Monetary Fund, and then World Bank President Jim Yong Kim.”

TREASURY: $700B OF COVID RELIEF FUNDS WERE DISBURSED — Reuters: “The U.S. Treasury on Thursday said it had disbursed about $700 billion of $1 trillion in Covid-19 relief programs administered by Treasury in the first six months since the American Rescue Program (ARP) was signed into law. Most of that money, $450 billion, was paid directly to families and households, through Economic Impact Payments totaling more than $400 billion, child tax credits totaling more than $46 billion, and more than $5 billion in rental assistance going out. Treasury said it has also sent $240 billion to help state, local and tribal governments.”

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FED UP PUTS OUT FED CHAIR CHECKLIST — The Fed Up Campaign, a coalition of labor and community groups, on Thursday listed 10 things they’d like to see in the next head of the Fed, including a dedication to “true full employment” and addressing the racial unemployment gap, but also a commitment to consumer accounts at the central bank and a focus on climate change.

MASSMUTUAL SETTLES CHARGES OVER ‘ROARING KITTY’ GAMESTOP TRADES — Our Kellie Mejdrich: “Insurer MassMutual will pay $4.75 million to settle charges brought by Massachusetts state regulators that the company failed to supervise social media usage and trading by employees including Keith Gill, best known for his role in the GameStop stock frenzy.

“Massachusetts securities regulators announced two settlements with MassMutual Thursday. The company has agreed to pay $4 million to resolve charges that it failed to monitor its agents and $750,000 for failing to register more than 400 employees transacting in securities over a roughly five-year period.”

Fly Around

WALL STREET SLIPS AS TECH, ENERGY STOCKS DROP — Reuters’ Ambar Warrick: “Wall Street indexes fell on Thursday as an unexpected rise in retail sales pointed to resilience in the economic recovery, pushing up yields and spurring a broad move out of heavyweight technology stocks. Economically sensitive sectors fared better than their peers, with financial stocks falling 0.2 percent - the least among the S&P sectors. An index of transport stocks — a common gauge of economic optimism — added 0.2 percent.”

ECONOMY SHOWS RESILIENCE DURING DELTA SURGE — WSJ’s Josh Mitchell: “The U.S. economy is proving resilient in the face of the Delta variant. Americans briskly increased spending at retailers last month, while employers have largely resisted the urge to lay off workers, the government reported Thursday, both signs of strong demand in the economy.

“Sales at the nation’s retailers rose 0.7 percent in August, rebounding from a drop in July, the Commerce Department said. With many schools, college campuses and offices reopening, consumers shelled out more for groceries and merchandise at big-box stores. Those purchases — along with higher spending on furniture and hardware — offset another big decline in car sales, which have suffered from a global computer chip-shortage that has crimped supply.”

But the job market disconnect has raised concerns over the recovery — AP’s Damian J. Troise: “The gulf between record job openings and a lack of people taking those jobs is forcing Wall Street to reassess the pace of the economic recovery. Jobs were gutted during the pandemic and employment growth has been a closely watched gauge for investors. Increasing employment eventually results in increased consumer spending, which is the biggest driver of economic growth. Without the former, analysts have said, it will take longer than expected for the economy to operate at some semblance of a pre-pandemic normal.”

MICROSOFT BACKS NEW FDIC FUND FOR MINORITY-OWNED BANKS — Bloomberg’s Akayla Gardner: “The Federal Deposit Insurance Corp. announced a $120 million investment fund backed by companies including Microsoft Corp. and Truist Financial Corp. that’s designed to serve low-income and minority communities. Discovery Inc. is also an investor in the first-of-its-kind fund that will allocate capital to banks that provide financial services to low-income, rural and minority borrowers, the FDIC said in a press release Thursday. While the regulator will serve as an adviser, the agency will not be involved in investment decisions.”

TRANSITIONS — The Bank Policy Institute has hired Anthony Bush, who was a legislative assistant for the House Committee on Oversight and Reform, as assistant vice president of government affairs with a focus on consumer and small business issues and economic inclusion. He starts Sept. 20.

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