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**OCTOBER 22, 2021**

Kuttner on TAP

The Fed's Lame New Standard on Trading

It relies on ethics officials who have waved through prohibited trades
before, and doesn't even cover the kind of trade that embarrassed Fed
Chair Jay Powell.

The Fed is now in damage control mode after the

**Prospect** reported Monday

that Chairman Jay Powell was among senior Fed officials who had sold
shares while the Fed was taking heroic measures to prop up the economy.
The Fed responded with new ethics rules-which fail to cover what
Powell did.

The release expressly says: "As a result of the new policies, senior
Federal Reserve officials will be limited to purchasing diversified
investment vehicles, like mutual funds." But Powell's big October 1,
2020, trade was the sale of between $1 million and $5 million from an
index fund, which is a mutual fund that closely tracks the broad market.
This kind of trade would still be permitted.

The potential for conflicts of interest on the part of senior Fed
officials is not solely around individual securities, but is based on
their privileged knowledge of how pending Fed policy will likely affect
the direction of the market as a whole.

The rules

prohibit senior officials from trading individual stocks or bonds, or
from all trading "during periods of heightened financial market stress."
They also require that officials give 45 days' notice and obtain
approval for any purchase or sale of securities, and they vow to
"restrict active trading," though that's undefined.

If strictly enforced, these rules could make some difference. But the
definition of a period of "financial market stress," approval of trades,
and other restrictions would be entirely up to the same officials that
waved through questionable trades previously.

For example, Powell's defenders have argued both that his October 1,
2020, trade was no big deal, and that he has always adhered to the
letter of the law. But a close review of Powell's prior trades reveals
that he executed five securities trades

involving mutual funds and exchange-traded funds on December 11, 2019,
during the blackout period

just before and after meetings of the policy-setting Federal Open Market
Committee, which he chairs. This is expressly prohibited
,
and yet it was allowed.

Those Powell trades were smaller than the October 1, 2020, trade,
totaling between $167,000 and $420,000. The disclosure forms offer no
information as to whether they were automatic reinvestments or other
rebalancing. But if there are exemptions given for the size, manner, and
type of securities traded, even when there is a definitive prohibition,
what are the rules, really? Are ethics officials there to enforce the
rules or to accommodate Fed officials (who are, as it happens, their
bosses)?

Meanwhile, The New York Times has reported

that in March 2020, the Fed's ethics office sent out a warning,
advising that senior officials should desist from unnecessary trades
during the period of special Fed support. This was ignored by at least
four senior officials.

In deciding whether to reappoint Powell as chair, three factors must
weigh on President Biden. First, has the trading scandal-his own
trades and those of three other senior Fed officials-fatally tarnished
Powell's credibility? Second, are Powell's very conservative views
on financial regulation consistent with Biden's own regulatory
policies?

And third, should Biden reappoint a conservative Republican or take this
opportunity to remake the Fed with a progressive majority-three of
whom would very likely be women? A new poll by Data for Progress,
exclusive to the

**Prospect**, finds that 58 percent of Americans and 85 percent of
Democrats support Biden appointing "a diverse team of women to the top
three leadership roles at the Federal Reserve."

By no small coincidence, three of the leading candidates

for seats on the Fed Board of Governors are Lael Brainard, a sitting
governor who is a likely choice for chair if Powell is passed over;
former Fed governor and deputy Treasury secretary Sarah Bloom Raskin;
and Michigan State economist Lisa Cook.

~ ROBERT KUTTNER

Follow Robert Kuttner on Twitter

Robert Kuttner's latest book is
The Stakes: 2020 and the Survival of American Democracy
.

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