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Three resignations of top Federal Reserve officials stemming from insider trading investigations put the Fed’s credibility at risk amid a turbulent economic time for the United States.
When countries began to announce mandatory quarantines and panic was growing in the financial markets due to the economic consequences and the potential financial crisis that was coming due to Covid-19, Richard Clarida, the deputy director of the United States Federal Reserve, sold almost five million dollars in shares that had already been losing value on the New York Stock Exchange. As a “planned portfolio rebalancing” the Federal Reserve described in its reports on the stock market movements that the senior officials of the US central bank have to report on a daily basis.
Clarida sold her shares on February 24, 2020 when markets were down to avoid losing more money on the stock amid a turbulent environment. However, three days later, on February 27 of that same year, he bought the same shares again when they had lost even more value. What most caught the attention of the researchers is that a day later, on February 28, Jerome Powell, director of the Federal Reserve, announced that it would use the tools at its disposal to mitigate the economic consequences of the pandemic and the general reduction in demand and consumption.
On February 26 of that same year, Fed officials met to define what macroeconomic measures to take to counteract the effects of Covid-19 on the economy, a meeting in which Clarida was not present, but on which she later obtained a report by a call that is registered with one of the attendees. On March 15, 2020, the Federal Reserve reduced the reference interest rate to 0%, bought Treasury bonds and other mortgage-backed financial products that exceeded 700,000 million dollars. Eventually, the financial markets recovered and so did the shares that Clarida had bought at rock-bottom prices before the anti-shock measures were taken.
NEW: Remember the Fed trading scandal? Vice Chair Rich Clarida corrected his disclosure, and his controversial trade now looks even more eyebrow-raising. https://t.co/wWjos09o6d
— Jeanna Smialek (@jeannasmialek) January 6, 2022
According the ‘New York Times’, this share buyback was not reported correctly and it was easily interpreted as a financial transaction that responded more to market conditions and to the confidential and privileged information that the manager had about the measures that the Federal Reserve was going to take to reactivate the economy and the financial markets. Maneuver that has been described as ‘Inside Trading’ by Senator Elizabeth Warren, a specialist in commercial law, and other experts.
Richard Clarida’s resignation under pressure
After investigations, initially revealed by Bloomberg, and many questions from congressmen and other experts, Richard Clarida submitted his resignation to President Joe Biden on Monday, January 10, 2022. His term ended on January 31, but he advanced his term two weeks and left office on January 14 . “It was an immense privilege to work for the Fed and I am proud to have had the opportunity to shape central bank policy,” Clarida wrote in his letter of resignation sent to the president, not to mention the investigations against him.
In this regard, Jerome Powell, director of the FED, said that Richard Clarida’s contribution and deliberations on monetary policy were going to leave a long-lasting impact on the field of central banking and that “his wise advice and his points of view will be missed.” vital view”. Powell, who was initially appointed to the post by former President Donald Trump, was reappointed by Joe Biden to continue directing US monetary policy for four more years.
Powell’s confirmation and the indications of financial movements with confidential information by his second in command come in a rather delicate context. Inflation in the country is at the highest point in the last 40 years and many are questioning the lack of action by the Federal Reserve to control the rise in consumer prices. Precisely at his confirmation hearing in the Senate, Jerome Powell stated that his focus from now on will be to control inflation through interest rate hikes during 2022.
Other previous resignations, a systemic problem within the Fed?
The credibility of the US central bank is at risk due to the behavior of some officials who would have put their personal interests above the interests of the economy, several analysts agree. And it is that, in addition to Clarida, Robert Kaplan, former president of the regional office of the Federal Reserve in Dallas and Eric Rosengren, former president of the regional office in Boston, also resigned for similar cases in September 2021.
Financial reports show how Kaplan moved millions of dollars in shares of oil companies during 2020 allegedly using privileged information that would have benefited him. On the other hand, Rosengren invested in real estate trusts while Federal Reserve policy was in place on purchases of mortgage-backed securities that benefited the real estate market.
“There is no justifiable ethical or financial reason for Clarida or any other government official to engage in these questionable market maneuvers while having access to non-public information and authority over decisions that have extraordinary impacts on markets and the economy,” he wrote. Senator Elizabeth Warren, who is part of the Senate Banking Committee and who wrote a letter to the president of the National Securities Market Commission (SEC), Gary Gensler, requesting an investigation.
For Peter Conti-Brown, a professor of legal studies and business ethics at the University of Pennsylvania, simply no regional central bank president or member of the board of governors should own a stock.
The Federal Reserve’s response
At his Senate confirmation hearing, Jerome Powell noted that the Federal Reserve is reviewing its bylaws because “it’s clearly not working” and is considering an outright ban on individual stock purchases. In addition, the Fed Government watchdog is investigating the operations carried out by officials in 2020.
Meanwhile, Lael Brainard, currently a member of the Federal Reserve board of governors, will succeed Richard Clarida as deputy chief of the US central bank if Congress ultimately approves her appointment.
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