2 top Fed officials step down after backlash over trades

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Two top policymakers at the Federal Reserve announced Monday that they will step down after coming under fire for securities trades they made last year during the pandemic when the central bank was engaged in a sweeping rescue of financial markets.

Dallas Fed President Rob Kaplan said he will depart as of Oct. 8, several hours after Boston Fed President Eric Rosengren announced he will retire on Sept. 30, citing health reasons. Their departures, which open up two key jobs at the central bank, could have significant policy implications as the Fed deliberates how quickly to remove its extraordinary support for the economy.

Both officials, who sit on the Fed’s interest-rate setting committee, were criticized after revelations that they had bought and sold stocks and real-estate-linked assets in 2020, leading to pledges from both to sell the assets by the end of the month to avoid the appearance of impropriety. The trades sparked calls by some progressive groups for their resignation and a push by Sen. Elizabeth Warren (D-Mass.) to ban all trading on individual stocks by Fed officials.

In the wake of the controversy, Fed Chair Jerome Powell vowed to tighten the central bank’s ethics rules.

In announcing his resignation, Kaplan said he “adhered to all Federal Reserve ethical standards and policies” but added that he was leaving because “ the recent focus on my financial disclosure risks becoming a distraction” to the Fed’s policy work.

Rosengren, who also says his trades complied with Fed rules, told staff that he qualified for the kidney transplant list last year “upon the worsening of a kidney condition he has had for many years,” according to a Boston Fed press release.

“Delaying the need for dialysis might be improved if he makes lifestyle changes now to lessen the risks of his condition,” the release added.

Because of the quasi-private structure of regional Fed banks, their presidents are not required to disclose their financial trades to the Office of Government Ethics, unlike Powell and other members of the Fed’s Washington-based board. The 12 banks prepare annual disclosures that they release voluntarily.

Kaplan is one of the Fed officials who is most inclined to increase interest rates sooner rather than later, saying the economy could reach a state of full employment as early as next year.

Rosengren, who has led the Boston Fed since 2007, has been a prominent voice warning about the potential risks to the financial system posed by low interest rates, which can increase investor motivation to make riskier bets for higher returns.

He turns 65 next June, an age when reserve bank presidents are generally required to retire. Whoever holds his seat will be a voting member of the Fed’s interest rate-setting committee in 2022. Given that he was already planning to retire, plans for a search process are “well under way,” according to the Boston Fed release.

Rosengren’s departure comes at a time when the Boston Fed has been working with the Massachusetts Institute of Technology to develop technology that could underlie an eventual central bank digital currency, and the first phase of that work could be completed this fall.

Powell, who testifies alongside Treasury Secretary Janet Yellen at the Senate Banking Committee on Tuesday, praised each of the two men.

“Eric has distinguished himself time and again during more than three decades of dedicated public service in the Federal Reserve System,” Powell said of Rosengren in the Boston Fed release. “He led the Fed’s work in managing several emergency lending facilities in two separate periods of economic crisis. In addition to his monetary policy insights, Eric brought a relentless focus on how best to ensure the stability of the financial system.”

He also said he was grateful for Kaplan’s six years of service in charge of the Dallas Fed. “He has been a passionate and forceful public voice on a wide range of issues, including the critical value of early childhood education and literacy,” Powell said of Kaplan. “In addition, he strengthened the Bank’s economic research and played a very constructive role in Systemwide management, budget and technology efforts.”

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