Fed watchdog clears top officials in trading investigation

An independent investigation into the trading activities of senior officials at the Federal Reserve has concluded transactions made by Richard Clarida, the former vice-chair who abruptly resigned in January, and chair Jay Powell did not break the law or violate rules.

However, the government watchdog with oversight of the US central bank, found that Clarida failed to report several trades in 2019 and 2020.

It also found that a financial adviser who managed a Powell family trust executed five trades during the so-called blackout period before the Fed’s December 2019 policy meeting. Public communications and trading are prohibited during that time.

The report said the trust required the trustee to make charitable donations annually each December, which Powell’s spouse initiated with the financial adviser. The financial adviser said the transactions were an “oversight”, according to the report.

Clarida said he was “gratified” by the findings, which he said showed he went “above and beyond financial ethics and disclosure requirements”.

“I have always been committed to conducting myself with integrity and respect for the obligations of public service, and this report reaffirms that life-long commitment to exceeding ethical standards,” he added.

The initial findings are the result of a months-long probe by the Office of Inspector General for the Federal Reserve board. The investigation, which was first disclosed by the central bank in October, intended to determine “whether trading activity by certain senior officials was in compliance with both the relevant ethics rules and the law”.

One of the worst reputational crises in the Fed’s history, the trading scandal led not only to Clarida’s resignation but also the departure of two regional presidents.

In September, Eric Rosengren and Robert Kaplan, formerly of the Boston and Dallas branches, were the first officials found to have been active participants in financial markets while the Fed was intervening aggressively to offset the economic damage caused by the coronavirus pandemic.

The inspector general said the investigation into those officials is still continuing.

Following the scandal, the Fed overhauled its rules for top officials and senior staff, barring leadership from buying individual shares and other investments and limiting transactions to “purchasing diversified investment vehicles, like mutual funds”.

Trading in cryptocurrencies, foreign exchange and commodities was also prohibited, along with the short selling of securities. Restrictions on when eligible policymakers can authorise transactions also tightened too.

The inspector general said it had cleared Clarida and Powell after conducting a “comprehensive review” of email accounts, brokerage statements and trading data, along with other documentation. Investigators also conducted interviews, it said.

Clarida first became embroiled in the controversy in the autumn, when he was found to have moved between $1mn-$5mn from a bond fund into a stock fund just days before the Fed announced emergency measures to shore up financial markets as the Covid-19 crisis intensified. At the time he said those transactions were part of a “pre-planned rebalancing”.

However, amended disclosures revealed months later showed that three days before the already reported transactions, Clarida had sold between $1mn-$5mn of shares from the same stock fund. He said his failure to report those trades was the result of “inadvertent errors”.

The central bank’s ethics officer also determined the trades to be “in compliance with applicable laws and regulations governing conflicts of interest”.