Federal Reserve Has Been Controversial After Being “Squeaky Clean” For Years

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Mariner S. in Washington, DC, Friday, September 17, 2021. Eccles Federal Reserve Building.

Stephanie Reynolds | Bloomberg | Getty Images

Next week, the Federal Reserve Board will hold a major meeting under a cloud of ethical dilemmas and a policy-making committee with a fairly clear division about the future path.

Markets primarily expect the Fed to follow a two-day session without major decisions, but first, the historically simple pandemic-era accommodation will slowly but soon end. But it is an important gesture.

“Tapering” is the term for the day a post-meeting statement will be released Wednesday, at which point individual officials will release future interest rate arcs as well as forecasts of economic growth and inflation. to do.

These are all set in the context of the dispute. According to recent news reports, Fed officials are trading stocks and bonds that could be at least indirectly influenced by policy decisions.

At the same time, speeches over the past few weeks show a divide between those who say it is time to introduce tougher policies and those who want to wait.

For a normally stable federal government, the current situation is unusual and could lead to some interesting dynamics.

Greg Barrier, a US policy strategist at AGF Investments, said of the trade dispute, which primarily involved President Robert Kaplan of Dallas and Eric Rosengren of Boston, “I think it’s embarrassing for the Fed. It’s so raucous. It was a prestige.

Valier said the issue would help inspire Fed critics such as Senator Elizabeth Warren, who has been vocally critical of the Fed’s relaxation of its regulatory approach since the 2008-2009 financial crisis. Rice field.

reliability issues

In addition, the Fed hinges on its credibility, and some recent problems could be denting it.

There is a market credibility issue. Wall Street and investors need to believe that the Fed is at least integrated into its monetary policy approach to set interest rates and related movements that affect the market. Then there is the trust of the people. When trust in Washington’s institutions is eroded, moral failures only add to it and can affect especially at such critical times.

“The morals here look bad. They should have known better,” said Joseph Flavorgna, chief economist for Natixis Americas during the Trump administration and former chief economist of the National Economic Council. said. “If you lose that moral authority, that’s a problem.”

Rosengren, Kaplan and other Fed officials who traded the shares did not violate any law or policy. In fact, it is part of the level criticism of some circles. After the financial crisis, the Fed did not clean house on internal rules to avoid the types of disputes that surfaced during the financial crisis. ..

“Remember, they already have [trading] For example, the rules apply to banks, but the Fed governor doesn’t follow the same rules,” said Christopher Holden, a Fed veteran and now president of Whelan Global Advisors. [the post-crisis banking reforms]All the agencies in Washington have tightened petty controversies like insider trading. Still, is the Fed somehow exempt from those rules? They look ridiculous. “

As part of that, the Fed states that it follows the rules of other government agencies and has supplemental rules.

Jerome Powell, appointed chairman of the Federal Reserve Board of Governors, shook hands with Senator Elizabeth Warren of the Massachusetts Democratic Party and testified at a confirmation hearing at the Senate Banks, Housing and Urban Committee on Capitol Hill. in Washington DC.

Sole Clothing | AFP | Getty Images

Nonetheless, a central bank spokesman said Thursday that Chairman Jerome Powell had instructed Fed employees to “consider new and broadly ethical rules regarding acceptable financial holdings and activities by Fed officials.” ..

“This review will help identify ways to further strengthen these rules and standards. The board will make changes as necessary and any changes to the Reserve Bank’s code of conduct will be added,” the officials added.

The controversy confronts the delicate backdrop of the Fed.

The central bank is preparing to take the first steps to re-normalize policy after slashing benchmark interest rates to zero and doubling the size of its balance sheet through more than $4 trillion in bond purchases.

The Federal Reserve Board is divided over policy. According to numbers from Goldman Sachs, six executives who have publicly spoken about the decline in property purchases are in favor and six are against it. On inflation, Powell expects price pressure to ease fairly quickly, but at least six Fed officials, including Governor Christopher Waller, said inflation would remain well above the central bank’s 2% target after 2021. He said he hoped to be there.

Another annoyance thrown into the mix is ​​that Powell’s term is set to end in February and President Joe Biden will soon announce his preferred choice to lead the bank. .. Most Wall Street expects Powell to be re-nominated, but Biden is likely to step down from Randall Quarles as vice president of banking oversight and use a heavy hand over banking regulation. There is a growing sense of being replaced by Governor Brainard. .

Under all these pressures, Powell needs to make sure the Fed has a sound understanding of policy and can address some of the recent controversies.

“It’s no surprise that Jerome Powell has been reappointed,” said LaVorguna, an economist at Natixis. “The administration will, of course, wait for the Fed to handle the taper and what the market is doing. That could be a deciding factor in whether they will be reappointed.”

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The Federal Reserve Has Been Controversial After Years of Being “Squeaky Clean”

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