The Federal Reserve’s greatest resource is its credibility. People have to believe the central bank will get inflation under control — or else inflationary psychology becomes entrenched and causes years of pain. Likewise, people need to trust that Fed leaders will prioritize what’s best for the nation over any personal gain — otherwise the central bank won’t survive.
This year has tested both aspects of Fed credibility. On inflation, there were early mistakes, but the central bank has largely restored trust that it will get the job done. It’s a different story on the ethics side: Top Fed officials took a series of questionable actions, and the central bank’s leadership has not satisfactorily reckoned with the increasingly glaring problem. In fact, Congress might have to force change; a bipartisan bill — the Financial Regulators Transparency Act — would help make this critical institution more transparent and accountable.
Fed Chair Jerome H. Powell and his fellow central bankers were regrettably slow to recognize the inflation threat, but since March they have acted decisively. Interest rates are now nearly 4.5%, a massive jump from January, when they were close to zero. The Fed has not hiked rates this swiftly in a single year since the early 1980s. There are encouraging signs that inflation is cooling; it hit 9.1% annually in June but dropped to 7.1% in November. The fight isn’t over, but Americans believe price increases will continue to subside, and Mr. Powell has admitted his mistakes.
Where the Fed repeatedly fell short is in its leaders’ conduct. Fed historian Peter Conti-Brown calls this an “unprecedented” era of ethical missteps by top officials. Numerous Fed leaders made sizable trades during the 2020 pandemic crisis when the central bank was taking extraordinary steps to save the economy and stabilize markets. They not only made the trades, but several officials failed to file the required disclosures about them on time. When the trading was exposed, those involved expressed little regret. Three of them — former Boston Fed president Eric Rosengren, former Dallas Fed president Robert Kaplan and former Fed vice chair Richard H. Clarida — retired early, but Kaplan was willing to say only that his trades risked “becoming a distraction.” It doesn’t help that the Fed’s inspector general still has not released its review of what Mr. Kaplan and Mr. Rosengren did.
The red flags didn’t end there. In October, Atlanta Fed President Raphael Bostic suddenly revised his disclosures to show multiple transactions in 2020 during the height of the crisis, as well as trades that took place during long-standing “blackout” periods before key policy-setting meetings. Mr. Bostic remains in his position. He says all transactions were done by his money manager and he had no knowledge of them.
On top of that, St. Louis Fed President James Bullard spoke in October at a private, invitation-only event for a top Wall Street firm where no media was present, raising concerns about bankers getting insider information. He also remains in his position.
Even if all these incidents didn’t violate the letter of the law, they broke its spirit and pummeled Fed credibility.
Mr. Powell deserves some recognition for significantly tightening the rules on how Fed leaders can trade. Top officials are now prohibited from purchasing individual stocks, and they must provide 45 days’ advance notice of any transactions. The presidents of the 12 regional Fed banks around the country — where many of the questionable acts took place — now have to publicly disclose trades within 30 days. These new rules are among the most stringent in government.
And rightly so. “The public’s trust is really the Fed’s and any central bank’s most important asset,” Mr. Powell said in November when a reporter asked for an update on the ethics problems. Mr. Powell added that all 19 top Fed leaders who help set interest rate policies had “recommitted” to “hold ourselves to the highest standards and avoid these problems.”
But Mr. Powell needs to do more than talk about a recommitment. There should be clear rules for when top Fed officials can accept speaking engagements. Perhaps the Fed could create a centralized approval process or specify that any discussion with more than five people must be open to the media.
The Fed should also have more effective oversight. Progressive Sen. Elizabeth Warren (D-Mass.) and conservative Sen. Patrick J. Toomey (R-Pa.) rarely agree, but they have jointly written a bill that would make the central bank more transparent. It would make the 12 regional Fed banks subject to the Freedom of Information Act, require the Fed to respond to congressional ethics requests and make the Fed’s inspector general a presidential appointee. (The Fed chair currently appoints the inspector general, so it’s not truly independent.) Congress should pass this legislation soon, and Fed leaders should welcome it.
The Fed has confronted this year perhaps the greatest monetary policy problem in a generation, tackling inflation with painful interest rate hikes that only a central bank, insulated from political pressure and capable of taking the long view, could institute. To preserve its position at the controls of the world’s largest economy, it should make restoring public trust as high a priority as fighting inflation.
The Washington Post
