(Washington Insider Magazine) -The Federal Reserve Bank of America announced rules that will limit and prevent central bankers from trading individual stocks and bonds. As Fed officials decide on policy that can move markets, the bank looks to address ethical concerns around policymakers’ ability to buy and sell stocks.
The Fed announced on October 21st that senior policymakers who fit on the Federal Open Market Committee will no longer be able to invest in individual stocks. Instead, officials will be limited to diversified assets like a mutual fund or index fund. While existing rules exist to limit unethical trading practices, the new rules completely bar top officials from trading individual bonds, shares, securities, or derivatives.
The Federal Reserve, commonly known as the Fed, is the central banking system of the United States of America. The organization sets the monetary policy for the country to maximize employment, stabilize prices, and moderate long-term interest rates. The policies enacted by the Fed can have wide-ranging impacts on the business cycle and market at large. Because decisions by the bank can have significant impacts on the market, there are ethical concerns around the policymakers having the ability to personally trade stocks while having the power impact the market.
In addition to removing the ability of trading certain investments, the new regulations require 45 days’ notice to buying or selling securities that are allowed. What’s more, investments must be kept for at least a year before they are sold.
Trading by bank officials has come under increased scrutiny during the COVID-19 pandemic. It has been reported that Fed officials were buying and selling stocks in line with bank policies designed to stimulate the market. The Fed purchased more than $4 trillion wroth of bonds to keep interest rates low and bought bonds from companies to ensure markets were stable.
Prior to the announcement of the new rules, multiple high profile bank officials, including presidents of the Dallas and Boston Fed, both resigned after engaging in trading individual securities in 2020. To that end, regional presidents will now have to disclose transactions within 30 days. Current holdings will need to be divested as the new rules are integrated.
Some elected officials such as Massachusetts senator Elizabeth Warren has called for more transparency from the Fed. Warren is demanding that an internal email sent to ethics officials within the Fed be released to the public, claiming that Fed officials may have been aware of unethical trading happening during the economic recovery from the pandemic.
Jerome Powell, Chairman of the Fed, will be seeking to be renominated to his post after his term expires in February. He has received support from Republicans and moderate Democrats, but will face scrutiny from progressive politicians, who feel his stewardship of the US economy has set back consumer and environment friendly regulations.
The new trading rules are a positive step in ensuring ethical practices from the US banking system. But for existing senior members maybe too late to absolve them from the current crisis.
