WASHINGTON — Sen. Elizabeth Warren sought to tie the controversy over trading by senior Federal Reserve officials with her opposition to another term for Fed Chair Jerome Powell.
Last month, Eric Rosengren and Robert Kaplan announced their resignations as heads of the Federal Reserve banks of Boston and Dallas, respectively, over scrutiny of trades they made while privy to pandemic response plans. A Bloomberg News report has also raised questions about trading by Fed Vice Chair Richard Clarida.
Warren, a Massachusetts Democrat, took to the Senate floor Tuesday to suggest that the scandal casts doubt on Powell's leadership abilities as President Biden considers whether to reappoint him.
“Our nation needs leaders who are willing to set and enforce strong ethics standards and who act swiftly when a problem arises,” Warren said. “Our nation does not need a go-along-to-get-along leader who doesn’t know or doesn’t care when, on his watch, people with great responsibility advance their own interests over those of our nation, or someone who drags his feet in dealing with problems that shake the public’s confidence in the institution he leads.”
Warren’s speech followed a letter she sent Monday to Securities and Exchange Commission Chair Gary Gensler urging him to investigate whether the trading activity by the three Fed officials violated insider trading rules.
Rosengren stepped down from the Boston Fed last week and Kaplan is set to resign Oct. 8. Meanwhile, Bloomberg reported Oct. 1 that Clarida had removed between $1 million and $5 million from a bond fund on Feb. 27 — days before the Fed cut its interest rate in response to the COVID-19 pandemic — and put similar amounts into stock funds.
“There is no justifiable ethics or financial rationale for [Clarida] or any other government official to be involved in these questionable market machinations while having access to non-public information and authority over decisions that have extraordinary impacts on markets and the economy,” Warren said in the letter to Gensler.
Powell announced in September that the central bank would review its ethics rules in light of the controversy.
“We need to make changes and we're going to do that as a consequence of this,” Powell
Powell added that he was not aware of Rosengren and Kaplan's trading last year that raised the questions about conflicts of interest. The Fed has previously said that its ethics framework is consistent with that of other government agencies, and is in some cases even more severe.
Still, Warren said on the Senate floor it wasn’t clear to her why Powell “did not take steps to prevent these activities.”
“Surely, he understands that this kind of behavior by Fed officials corrodes the public's trust in the Fed, and that, in turn, such corrosion undermines the effectiveness of the Fed,” she said.
The central bank declined to comment on Warren's remarks Tuesday.
During a Senate Banking Committee hearing last week, Warren announced that
But Warren added Tuesday that Powell “has also failed as a leader” of the central bank.
“As the sitting chair of the Federal Reserve, the responsibility to safeguard the integrity of the Federal Reserve rests squarely with him,” Warren said. “Setting the right culture at the Fed and making sure safeguards are in place to prevent self-dealing and protect the public’s confidence should be the minimum standard any Federal Reserve Chair should meet.”
A Fed spokesperson said Monday that the central bank began discussions last week with the agency’s inspector general about launching an independent review of whether the trading activity of Fed officials violated either ethics rules or the law. The Fed “welcome[d] this review and will accept and take appropriate actions based on its findings,” the spokesperson said.
In Warren’s letter to Gensler, she noted that if the trading activity were based on the officials' knowledge of private information known only to the central bank, it “may have represented potentially illegal activity.”
Violations of the SEC’s insider trading rules could come with criminal penalties of up to $5 million and 20 years in prison.
So far, Warren is the only senator to come out against a Powell reappointment. Although most analysts expect Powell to be renominated before his term as chair expires early next year, some say the trading scandals could complicate efforts to extend his Fed tenure.
"While we still believe that Fed Chair Jay Powell is more likely to be renominated than not, the drip-drip-drip of bad news, including revelations about Vice Chairman Richard Clarida’s securities trades, are unhelpful,” Ian Katz, an analyst with Capital Alpha Partners, said in a research note. “If Biden is going with Powell, he might want to make that announcement soon."
