Two senior members of the Federal Reserve, the US Federal Reserve, who were under scrutiny following investments they made last year, announced yesterday (Monday) their retirement from the bank amid a dispute that has already ignited a debate over the Fed’s code of ethics.
Dallas Fed President Robert Kaplan announced he would retire on Oct. 8, referring to the “distraction” from the controversy over his investments, while Boston Fed President Eric Rosengren announced he would retire on September 30 due to his health condition.
The two are among 12 presidents of regional federal banks who receive alternate seats on the central bank’s monetary policy committee that sets US interest rates.
Calls for Kaplan and Rosengran’s retirement came in the wake of investments made in 2020, a year in which the Fed took unprecedented steps to stabilize the economy. The news of the deals revealed in recent financial revelations has raised questions about the effectiveness of Fed guidelines for policymakers.
The two’s departure comes after Fed Chairman Jerome Powell, who is nearing the end of his term and is undergoing a re-examination process for reappointment as Fed director, called earlier this month to review central bank ethics laws and said the policy should be changed.
Powell is due to testify before the Senate Banking Committee today (Tuesday), where he may address questions from Democratic Sen. Elizabeth Warren, who is demanding stricter ethics rules at regional federal banks.
According to the financial revelations first reported in the Wall Street Journal, Kaplan made multiple million-dollar trades in individual stocks in 2020. Rosengren invested in real estate investment firms on a smaller scale but was criticized for making moves while screaming and warning of real estate risks .
The financial disclosures did not appear to be significantly different from previous years, and the two executives said their investment deals had been reviewed by ethics officers and did not violate Fed policy. They have also previously agreed to sell their shares by the end of September, in order to avoid even the appearance of a conflict of interest.
However, during a year in which millions of Americans lost their jobs and the Fed took extreme measures to stabilize the financial markets and economy following the epidemic, these actions were still perceived as problematic.
Asked if he trusted the two presidents of the regional federal banks to do their job, Powell said last week that “in terms of security and stuff like that, I think, no one is happy.”
Despite the resignations of the two, calls for broader reform of the Fed’s ethics rules continue as outside groups pressure Powell to take more significant action.
Yesterday (Monday) Kaplan said that “unfortunately, the recent focus on my financial discoveries is becoming a disruption to the performance of the Federal Reserve’s vital work.”
Rosengren earlier noted his health condition as a reason why he decided to retire. In a statement that did not mention the investment-related controversy, Rosengren revealed that he entered the kidney transplant list in June 2020 and wanted to make “lifestyle changes” in order to protect his health. While Rosengren was about to retire this June, the Fed rules would have allowed Kaplan to stay until 2025.
The Fed’s last departure, which caused a stir, was in 2017 when Richmond’s Fed President Jeffrey Laker resigned, admitting that five years earlier he was the source of the information used in the advisers’ report which at this point included unpublished information. Lacker took the blame and said that “his conduct is inconsistent with confidentiality policy.” In contrast, Rosengren or Kaplan did not recognize a violation of the Fed’s code of ethics that requires them to follow certain trading practices and even avoid conflicts of interest.
Kaplan, 64, the son of a jewelry salesman, a graduate of Harvard Business School and a senior executive at Goldman Sachs, where he worked for 23 years, was named Dallas’ Fed president a little over six years ago. Rosengren, a doctor of economics, has been president of Boston’s Fed since 2007, and has been part of his staff since 1985. Before becoming president he was head of the bank’s supervisory and regulatory division. The first vice president of the Dallas Fed, Meredith Black, will serve as interim president after Kaplan’s retirement. Boston’s first vice president, Kenneth Montgomery, will take over as interim president during a search for Rosengran’s successor, who has already set out in light of his impending retirement.
The resignation of the two senior officials leaves a wider opening for significant changes in the Fed leadership. U.S. President Joe Biden will soon decide whether to reappoint Powell and is willing to nominate three more people to the Washington-based, seven-member council that has been criticized for years for being made up of only white men. A more diverse range of regional bank presidents, who are elected by local boards with the approval of Fed governors.Today, seven out of 12 bank presidents are white men, three white women and two non-white men.