WASHINGTON—U.S. Federal Reserve Chair Jerome Powell on Thursday promised to redouble efforts to find “diverse candidates” to replace two high-profile officials who resigned this week after criticism of their securities trading, as the central bank tried to regroup from a blow to its typically staid, technocratic image.
“I can absolutely guarantee you that we will work hard in both of those processes to find and give a fair shot to diverse candidates for those two jobs,” Powell said in response to a question from Representative Joyce Beatty of Ohio during an appearance before the House Financial Services Committee. “It will be a big focus.”
Meanwhile, heads of the Fed’s regional banks said they welcomed an ethics review—and likely new restrictions on their personal affairs—launched by Powell following reports Dallas Fed President Robert Kaplan and Boston Fed President Eric Rosengren had traded actively in securities during 2020, a year when the Fed was battling to keep the economy and financial markets on track during the pandemic.
Both men on Monday announced they would resign, but the controversy has renewed longstanding calls for reform of the Fed’s arcane structure and particularly of the selection process, conducted largely out of the public eye, for the regional bank presidents. It has also given Powell’s critics a new line of argument as he awaits a decision by President Joe Biden about reappointment to a second four-year term.
Other regional bank presidents interviewed this week, while reluctant to directly criticize their departing colleagues, endorsed the need for tighter ethics rules to build confidence in how the Fed wields its immense power over the economy.
“The world has evolved so I think it is fully appropriate for us to be reviewing the rules and making changes,” Atlanta Fed President Raphael Bostic said in comments to reporters, adding he was asking the general counsel at his own bank for ideas about changes the Atlanta Fed could make on its own.
Fed officials come under the same ethics rules governing members of Congress and the executive branch, with additional restrictions against owning financial sector stocks or mutual funds, trading around the time of Fed meetings, and using their access to non-public information for private gain.
Kaplan and Rosengren both said their actions were vetted and approved by a Fed ethics officer—a fact that led officials from Powell on down to conclude that, at a time when the Fed faces intense scrutiny over whether it looks out mostly for Wall Street or Main Street, the rules themselves might be the problem.
“In terms of … whether there need to be changes, I think that is clearly the case,” San Francisco Fed President Mary Daly said this week.
Out of Step
It’s a reckoning that has been a long time developing.
The Fed’s system has roots in a fundamental American debate over the value of a centralized monetary policy versus regional suspicion of vesting too much power in Washington.
The more than century old compromise—powersharing between a presidentially appointed board in Washington and 12 regional banks—still serves a purpose in promoting “more diversity of views” about the economy, said Columbia Law School professor Kathryn Judge.
But the structure, with the regional reserve banks set up as private institutions technically owned by the banks they supervise, with their own boards of directors and outside the scope of some federal statutes like the Freedom of Information Act, has arguably grown out of step with modern notions of democratic governance.
“In terms of transparency and accountability the fact that they are neither fully public or fully private but are in a gray space is disconcerting since they are carrying out incredibly important public roles,” most notably participating in discussions and sometimes voting on interest rate and other monetary policy decisions that affect everyone, Judge said.
For its faults, said William Spriggs, AFL-CIO chief economist and a Howard University professor mentioned as a possible board nominee, the current set-up could probably be fixed without a massive overhaul, but with closer oversight of the regional banks by the Board of Governors, and a stricter recognition of the regional presidents’ public obligations.
Three of each regional bank’s nine directors, for example, are appointed by the Fed’s Board of Governors, offering one avenue for influence. In addition, the Board has final say over who becomes president, and Spriggs argued it could use that authority more aggressively.
“There is a way for the Board of Governors to do a better job itself … Ethics expectations are a part of that,” Spriggs said. “I am astounded that it would not have occurred to some of the presidents…that you cannot trade, or that you should not trade because of the impression” of a conflict of interest.
“Yea it’s a weird structure. But the fiduciary responsibility is a public fiduciary responsibility.”
The hiring of replacements for Kaplan and Rosengren will be closely scrutinized through that lens, as well as for Powell’s pledge to promote diversity.
By Howard Schneider