What Do the Federal Reserve’s New Ethics Rules and Other Changes Mean?

Jerome Powell, chair of the Federal Reserve, in Washington, D.C., on Oct. 6, 2021. Powell announced changes to the Fed's ethics rules on Oct. 21. (Photo By Tom Williams/CQ-Roll Call, Inc via Getty Images)

Jerome Powell, chair of the Federal Reserve, in Washington, D.C., on Oct. 6, 2021. Powell announced changes to the Fed's ethics rules on Oct. 21. (Photo By Tom Williams/CQ-Roll Call, Inc via Getty Images)

November 3, 2021

Feb. 22, 2022, update: On Feb. 18, the Federal Open Market Committee released a detailed investment and trading policy for FOMC officials that will take effect May 1. Jerome Powell, whose term as Fed chair officially ended this month, remains as chair pro tempore. President Joe Biden announced last November that he planned to nominate Powell for another four-year term as chair, but Powell has not yet been reconfirmed.

On Oct. 21, the chair of the U.S. Federal Reserve, Jerome Powell, announced a set of new ethics rules that will regulate the type of financial transactions Fed leadership and senior staff can make. Powell’s statement came after harsh criticism of recent market trades, primarily by two Federal Reserve Bank presidents, although Powell and other Fed officials have also come under scrutiny.

“The judgement seemed extraordinarily bad,” said David Wessel, head of the Brookings Institute’s Hutchins Center on Fiscal and Monetary Policy. 

The new rules, established by the Federal Reserve Board of Governors, apply to the powerful Federal Open Market Committee (FOMC), which sets monetary policy in the U.S. FOMC members include the seven governor seats, the president of the Federal Reserve Bank of New York and the 11 district bank presidents who share four rotating spots on the FOMC, as well as senior staff.

The Fed’s response to COVID-19 in spring 2020 — including the extended bond-buying program known as quantitative easing, or QE, that has been credited with staving off an economic crisis and bolstering financial markets — was examined in the July 2021 FRONTLINE documentary The Power of the Fed.

As was widely anticipated, Powell announced Nov. 3 that the Fed would begin slowing those asset purchases later in the month. With the Fed’s next move on monetary policy established, here’s a look at the recent ethics changes.

What are the changes to the Fed’s ethics rules?

The Oct. 21 announcement offers a general idea of the new rules — they’ll “prohibit the purchase of individual securities, restrict active trading,” which means Fed officials can’t buy individual company stocks, only diversified offerings, like mutual funds — but it’s not clear if the rules will be fully disclosed or when they’ll be implemented.

The announcement also said Fed officials will be required to provide 45 days’ advance notice for certain transactions and must obtain approval, but it’s not clear who would give the OK. Previously only members of the Board of Governors and senior staff were required to disclose financial transactions within 30 days of making them, but now Reserve Bank presidents must do so, too — in advance. 

The Federal Reserve Board of Governors, which oversees the 12 Federal Reserve district banks, last issued an employee code of conduct in 1994, followed by an update to its 1970 voluntary guide to conduct for senior officials in 2017.

Read more: Who Is on the Federal Reserve Board? 

“These rules were written at a time when the Federal Reserve was not one-tenth of the size it is today and was not … controlling and pushing the prices in so many different financial markets,” said Andrew Huszar, a former official at the New York Federal Reserve Bank who managed the institution’s first quantitative easing program, in response to the 2008-09 economic crisis.

“The ethics system we had in place had been in place for decades and, as far as we knew, had served us well, and then that was no longer the case,” Powell said at the Nov. 3 press conference.

“It would have been much wiser for someone inside the institution’s leadership to actually proactively think about what would be the appearance” of potential impropriety, Huszar said.

Why did the Fed make these changes?

The changes followed harsh criticism over news of questionable trading by two Reserve Bank presidents, in particular. The Wall Street Journal first reported on Sept. 7, 2021, that Robert Kaplan, the president of the Dallas Fed for six years, traded over $22 million in securities over multiple transactions in 2020. Bloomberg reported the next day that Eric Rosengren, president of the Boston Fed for 14 years, traded real estate stocks in May 2020.

According to The New York Times, the Fed’s Ethics Office sent an email to the reserve banks in March 2020, recommending that officials avoid engaging in trading activities while the Fed was making the massive asset purchases known as QE. According to the Times, Kaplan didn’t disclose the dates of his trades but said they did not occur in late March through April 2020; the Fed launched its current QE program in March 2020. Both Kaplan and Rosengren declined invitations from FRONTLINE to be interviewed for The Power of the Fed.

Read more: An ‘Epic Mistake’? Former NY Fed Exec Worries About Federal Reserve’s Ongoing COVID Response

Kaplan announced his Oct. 8 retirement in a Sept. 27 statement, saying: “during my tenure, I have adhered to all Federal Reserve ethical standards and policies. My securities investing activities and disclosures met Bank compliance rules and standards.” Rosengren cited serious health issues as reason for advancing his own retirement, originally scheduled for 2022, to Sept 30, 2021.

February 2020 transactions by Fed Vice Chair Richard Clarida also have come under questioning, with trades between $1 and $5 million occurring one day before a statement from Powell signaling possible policy action in response to the pandemic, according to Bloomberg. Powell’s own 2020 selling of municipal bonds has also come under question.

Huszar and other experts called Powell’s transactions “the most passive,” in explaining why the Fed chair hasn’t faced more public scrutiny.

“Nevertheless, it created, again, this uncomfortable and unfortunate appearance that potentially the chairman of the Fed was profiting from certain decisions on the part of the central bank to overtly try to push up prices of certain types of financial assets in the market,” Huszar said.

Were the transactions illegal? What are the consequences?

It’s not clear yet if charges will be brought against Kaplan or Rosengren. A Fed spokesperson said in an Oct. 4 statement: “As part of our comprehensive review, we began discussions last week with the Office of Inspector General for the Federal Reserve Board (OIG) to initiate an independent review of whether trading activity by certain senior officials was in compliance with both the relevant ethics rules and the law. We welcome this review and will accept and take appropriate actions based on its findings.”  

The OIG confirmed to FRONTLINE that it has agreed to a review but didn’t comment on the scope or timeline.

“In terms of laws broken, I asked the inspector general to see whether there were rules broken and whether there were laws broken,” Powell said on Nov. 3. “I won’t speculate on that.”

Previously, in a September congressional hearing, Powell had said that Kaplan’s and Rosengren’s trades seemed to comply with Fed rules at the time but also said, “the problem is that the rules and the practices and the disclosure needs to be improved, and that’s what we’re working on.”

Read more: 5 Things You May Not Know About Jerome Powell, Chair of the U.S. Federal Reserve

Of the trades in question, Huszar said: “They could potentially be viewed as insider trading,” in that those involved were “close to conversations that will have fundamental impact on the direction of the markets — not to say they are necessarily in a position to influence those decisions directly.”

But, Huszar said, “I see it less about a true violation and more just about a fundamental lack of appreciation of the reputational risks and of the proper appearance that a government official needs to have in the exercise of their responsibilities.”

Experts told FRONTLINE the situation affects public trust in the Federal Reserve.

“It may not have violated any ethical rule at the Fed, although the policy of the Fed says you shouldn’t do anything that will embarrass the institution,” said Brookings’ Wessel.

David Beckworth, a senior research fellow at George Mason University’s Mercatus Center, said the trading controversy matters because any perceived conflict of interest impacts the Fed’s credibility as an independent institution capable of setting unbiased monetary policy.

“They really did shoot themselves in the foot,” Beckworth said. “These new rules repair some of that damage, but it probably will take time to completely make up for the tragic decisions that were made by these officials.”

When was the last time Kaplan and Rosengren had voting seats on the Fed Board?

Because only the New York Fed president and four of the 11 other Reserve Bank presidents have a seat on the powerful FOMC at any given time, Rosengren last held a voting seat in 2019 but was present at the 2020 FOMC meetings. Kaplan held a voting seat in 2020, when the criticized transactions took place.

Has anyone replaced the two bank presidents?

Kaplan and Rosengren were temporarily replaced by the sitting vice presidents from their district banks: Meredith N. Black, in Dallas, and Kenneth C. Montgomery, in Boston. The process to choose new presidents is underway.

Each of the 12 Federal Reserve district banks has its own nine-person board: some of whom are bank directors and some of whom are unaffiliated with banks. The unaffiliated board members lead the searches for new district bank presidents, and only they can vote on candidates. Once a new president is voted in, that person is confirmed by the Fed’s Board of Governors. 

This process differs from how the Board of Governors are chosen, each of whom is appointed by the sitting U.S. president and confirmed by the Senate.

“This is a gap in the Fed’s governance,” Wessel said.

The Reserve Bank presidents “are members of the Open Market Committee; they are participating in very important decision making, with respect to U.S. economic policy; and unlike just about everybody else who does that, they are not confirmed by the Senate,” said Benjamin Friedman, a professor of economics at Harvard University.

The new rules also apply to Fed senior staff, although who counts as senior staff hasn’t been specified. Huszar said he interprets it to mean any person who conducts transactions on the floor of the Federal Reserve Banks.  

Will the controversy impact Powell?

Experts told FRONTLINE the controversy could hurt Powell’s chances of being renominated as chair when his current term ends in February 2022 but will not erase them.

“It’s embarrassing; it happened under his watch,” Wessel said. “People who are against Jay Powell’s reappointment will use this as one more reason [he shouldn’t be] reappointed. But I don’t think there’ll be a difference.”

At the Nov. 3 press conference, Powell made it clear he would not address the renomination process but said: “From the very beginning, my reaction was that we needed to deal with this transparently, straightforwardly and forcefully … . I like to think we’ve made a real good start on that.”

Lael Brainard, a current member of the Board of Governors who was first appointed by President Barack Obama in 2014, has been considered a rival for the chair position. According to a U.S. Office of Government Ethics report via Reuters, Brainard made no transactions in 2020.

“Anybody who’s telling you that they know what’s going to happen, in my opinion, is pretending,” said Karen Petrou, a financial and policy analyst, and author of the 2021 book Engine of Inequality: The Fed and the Future of Wealth in America. 

Two other seats on the Board of Governors are in flux. In addition to a vacant seat, Randal Quarles’ term as Vice Chair of Supervisor ended in October without his reappointment or a new nomination, although Quarles remains a general member of the Board.

President Joe Biden, who hasn’t announced candidates for any of the positions, has been criticized for taking too long. Some experts think he will present a package of nominees to Congress along with the chair appointment.

“We expect the decision to happen soon, and historically, it’s happened in late October, early November,” said Kaleb Nygaard, a senior research associate at the Yale Program on Financial Stability. 

Turning to monetary policy, how likely is Powell to announce the slowing of asset purchases this week?

(Editor’s note: Powell announced the tapering of Fed asset purchases on Nov. 3, after this story was first published, following a two-day meeting of the FOMC.)

“It will be the beginning of the end — of at least the growth of the portfolio since COVID,” Petrou said Tuesday, in anticipation of the announcement.

“I still think we’ll end up with a portfolio in the multitrillions, but it’ll start to taper.”

Originally published Nov. 2, this story was updated Nov. 3 to reflect statements Powell made at a press conference that day. 

In addition to streaming below, The Power of the Fed is available in FRONTLINE’s online collection of documentaries, on the PBS Video App and on FRONTLINE’s YouTube channel. 


Paula Moura

Paula Moura, Former Digital Reporter, FRONTLINE



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