Democrats urge Fed to toughen investment rules for senior officials

Democratic senators are urging the Federal Reserve Board to strengthen its ethics policies and bring more oversight to the actions of its regional reserve bank leaders.

In a letter sent to Fed Chair Jerome Powell on Wednesday, Sen. Sherrod Brown of Ohio, chair of the Senate Banking Committee, and four other senators urged the central bank to strengthen a recently adopted policy on investments and securities trades by senior officials within the Federal Reserve System.

The senators, including Kirsten Gillibrand of New York, Jeff Merkley of Oregon, as well as Raphael Warnock and Jon Ossoff, both of Georgia, called for the Fed to add “real teeth” to the directive, which further limits the type of trading activity allowed by Fed officials and their family members.

The senators criticized the policy, which was implemented this past February, for failing to establish “standards for disciplinary action, financial penalties, or other meaningful consequences for violations.” They also expressed concerns that the new guidelines applied only to officials who work for the board in Washington and not the 12 reserve banks throughout the country.

“We urge the Federal Reserve to establish penalties or other consequences for violation of this policy, increase accountability in the structure of the program, and implement the code of conduct so that these rules have the force of law,” the senators wrote.

The policy change in question stems from a trading scandal involving the former heads of the reserve banks of Boston and Dallas. Both men left office amid controversy over trades executed in 2020 as the Fed was adjusting monetary policy to support the economy during the early stages of the pandemic.

The Fed’s Office of the Inspector General is looking into the trades made by the officials, and several members of Congress have called for the Fed to release more information about the trades made along with the internal handling of the matter. Former Vice Chair Richard Clarida was also implicated for trades made around the same period but was cleared by the inspector general this week.

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“In light of your commitment to full transparency and to restore public trust in the Federal Reserve, we also repeat our request for your cooperation with members of Congress and the Federal Reserve’s Office of the Inspector General as we seek to understand the full depth of the Fed’s trading scandal,” they wrote.

The pressure campaign encouraging the Fed to update its policies voluntarily is part of a two-pronged approach by Democratic senators to restrict questionable trades by central bank officials. Brown previously introduced a bill that would establish new regulations for the Fed and penalties for those who violate them. 

Democrats’ efforts to implement stronger investment rules comes as Republicans mount their own push to reform the Federal Reserve System and establish greater accountability for regional reserve banks.

Concerned by so-called ‘mission creep’ — research focused on issues not directly tied to the Fed’s dual mandate of price stability and full employment — and a lack of transparency around the granting of access to the Fed’s payment system, several Senate Republicans have called for enhanced oversight and proposed their own legislative actions.

There is no indication yet of either initiative garnering support from across the aisle, but the fact that both Democrats and Republicans are concerned about accountability within the Federal Reserve System strengthens the possibility of some type of reform.