Powell, Clarida cleared by Fed watchdog of wrongdoing in trading activity

The Federal Reserve’s inspector general on Thursday cleared former Vice Chair Richard Clarida and Fed Chair Jerome Powell of wrongdoing in an ethics scandal centered on trading activity by top central bank officials.

Clarida, who stepped down in January, came under investigation after trades he made in February 2020 drew scrutiny as part of the broader scandal that also led to the resignation of two other top Fed policymakers.

The IG said Clarida discovered during the watchdog’s investigation that he had failed to fully disclose financial transactions in February 2020. That omitted trading activity came to light after being reported to the Office of Government Ethics late last year, and Clarida resigned his post shortly thereafter. The IG found that the exclusion of that additional trade was “inadvertent.”

The investigation also found that a financial adviser for Powell’s family trust improperly made trades during the blackout period around a Fed policymaking meeting in December 2019. The inspector general said there was no evidence that either Powell or his wife “had contemporaneous knowledge that the five transactions were executed during the blackout period.” The trades were designed to make funds available for annual charitable donations, according to the watchdog.

“We found that former Vice Chair Clarida’s and your trading activities did not violate the laws, rules, regulations, or policies as investigated by our office,” the IG said in its report.

The report is the latest twist in an embarrassing saga for the central bank that led three of the top policymakers to step down and has cast doubt on the ethics practices at the central bank. Powell has since announced a major overhaul of conflict-of-interest rules, saying Fed policymakers and senior staff will be prohibited from active trading and will be able to purchase only diversified investment vehicles like mutual funds.

It’s not over: The IG is still in the middle of its investigation of former Dallas Fed President Robert Kaplan and former Boston Fed President Eric Rosengren, both of whom also departed the central bank after problematic trading activity came to light.

The watchdog suggested that future reports could shed more light on why Clarida’s trades did not break any rules, a matter that is almost entirely skirted in the initial report.

“Our investigation of the senior Reserve Bank officials is ongoing,” the IG said. “Because ongoing investigations are highly sensitive, and because the scopes of the two investigations are interrelated, we will provide a detailed analysis of both our investigations at the conclusion of our review regarding the senior Reserve Bank officials.”

Rebalancing? Clarida had initially already come under fire in October because he had moved between $1 million and $5 million out of a bond fund into a stock fund on Feb. 27, 2020. That was just a day before Powell signaled that the central bank might move to cushion the economy when the pandemic hit the U.S.

But there was another trade, originally omitted from his financial disclosure, that raised questions about the explanation he had provided through a Fed spokesperson: that his sale of the fund represented a pre-planned “rebalancing.” That’s a term investors use to describe portfolio adjustments designed to maintain a certain proportion of stocks and bonds as market conditions change.

In a correction to his 2020 financial disclosure, Clarida said he had sold between $1 million and $5 million in the same stock fund three days prior to buying it.

Tony Fratto, a spokesperson for Clarida, said on a call with reporters Thursday that the former vice chair had originally planned to rebalance that week but then decided to return to his initial position.

Fratto also said Clarida was not aware at the time of any plan for Powell to release a statement hinting at future Fed action to aid the economy. Such a statement was released the following day.

“The most important point is that the criticism of his trades was that he had non-public information about what the Fed would do in the future,” Fratto said. “OIG found no evidence of that.”