Trading Scandal That Rocked the Fed Offers Chance to Reshape It
The resignation of two Federal Reserve chiefs amid a stock-trading scandal means an unexpected number of top monetary-policy jobs are coming up for grabs –- and there’ll likely be an unusually intense spotlight on who fills them.
Eric Rosengren and Robert Kaplan, presidents of the Fed branches in Boston and Dallas, announced their retirement on Monday following disclosures about their trading activity last year.
The episode embarrassed the Fed, which is trying to persuade the public that it cares about Main Street even as its policies enrich asset holders.
It also leaves six seats on its 19-member Federal Open Market Committee that could be filled in the coming months, at a time when the central bank is under pressure to make its top ranks more diverse -- and also split over the outlook for monetary policy.
As they seek to defuse the former criticism, the bank’s leadership in Washington is likely to grab more influence over new appointments at the regional banks, whose own boards may end up getting sidelined, Fed-watchers say.
‘A Wider Range’
There’s “an opportunity for the Fed’s Board of Governors to initiate a more open and transparent process” for selecting Fed presidents, said Andrew Levin, a Dartmouth College economist and former Fed Board senior staff member. “Serious consideration should be given to a wide range of candidates, not just longtime Fed insiders or those with close ties to finance and wealth management.”
Raphael Bostic, the Atlanta Fed chief, became the first Black regional president in 2017, more than 100 years after the system’s establishment in 1913. Among the 12 current regional presidents, just three are women.
Along with its racial and gender makeup, the FOMC’s policy inclination could shift too. Right now, it’s finely balanced.
In its most recent set of projections, the committee was evenly split between those who expect rates to stay near zero through the end of next year -- to bolster growth and employment -- and those who expect at least one hike before the end of 2022, to counter a spike in inflation as the economy reopens.
The departing Rosengren is viewed as moderately hawkish -- as are Richard Clarida and Randal Quarles, two vice chairs of the Fed whose terms are due to end in the coming months. Their replacements could swing the committee in favor of officials who would like to take their time in tightening policy.
Chair Jerome Powell’s term is also due to end in February. President Joe Biden hasn’t indicated whether he’ll reappoint him and a decision is expected this fall.
Reviewing the Rules
Rosengren, 64, said Monday he’ll depart on Thursday -- more than nine months ahead of his mandatory retirement -- citing health concerns. Kaplan, who’s the same age, could have remained in his post until 2025, but said he’ll depart on Oct. 8 instead.
The announcements followed revelations earlier this month about stock-trading which led both men to pledge that they would divest individual stocks and other controversial holdings. Powell said he would conduct a system-wide review of the rules governing the permissible investment holdings and activities of senior Fed officials.
Kaplan and Rosengren both made purchases while the Fed was buying a wide range of assets to support the economy. They’re not the only policy makers to run into trouble over such issues.
Members of Congress on both sides of the aisles have been criticized over profits that they or members of their family have made on individual stocks, at a time when public policy during the pandemic is widely seen as propping up financial markets.
The search for Rosengren’s and Kaplan’s successors would ordinarily be led by the heads of the Boston and Dallas Fed boards. Unlike members of the Board of Governors, who are nominated by the president and confirmed by the Senate, regional chiefs are selected by that bank’s board of directors -- typically made up of regional business leaders and members of non-profit organizations.
‘Where Did They End Up?’
But in recent years their appointments have drawn more scrutiny, especially over the question of diversity -- prompting the Board in Washington to become more deeply engaged in the search and selection process.
While Bostic’s appointment in 2017 and Mary Daly’s selection in San Francisco in 2018 were welcomed, four other spots went to white men, three of whom were Fed insiders.
In 2015, the Philadelphia board picked one of its own members, Patrick Harker, for the top job. Also in 2015 Dallas chose Kaplan, a former Goldman Sachs executive. In 2018, Richmond tapped former McKinsey consultant Thomas Barkin and New York chose John Williams, then already president of the San Francisco Fed.
During its search, the New York Fed board claimed to put an emphasis on diversity and inclusion, said Claudia Sahm, a former Fed economist and senior fellow at the Jain Family Institute.
“Where did they end up?” she added. “With a white guy who grew up inside the Fed.”
©2021 Bloomberg L.P.