In the past couple of decades, the Federal Reserve has increasingly found itself under scrutiny. Many blame it for the dot-com and housing bubbles around the turn of the millennium, while others believe its unconventional policies will inevitably ignite an inflationary spiral. Regardless of these issues, the Fed has enjoyed better approval ratings and has been less politicized than most parts of government.
This credibility and consensus is an important ingredient in creating confidence around its actions. So, the recent revelation of aggressive trading during the pandemic by Dallas Fed President Robert Kaplan and Boston Fed President Eric Rosengren was such a big deal even though the amounts weren't too egregious.
This is obviously an ethical red flag as they were involved in creating policy that would move these stocks. Additionally, the frequency of the trades was also alarming as it indicated that they were spending some portion of their time, trading stocks rather than working.
Initially, both agreed to sell individual stock holdings and move the proceeds to passive holdings to placate any ethics concerns. Both also pledged that they wouldn't buy or sell individual stocks for the remainder of their tenure. In his press conference, Chair Jerome Powell addressed the controversy and said the bank would seek stricter limits and controls on Governors' trading activity.
This foreshadowed that the fallout was much bigger and not contained by these measures. Given the tenuous political environment with the fate of many Fed governors including Powell and Vice-Chair Lael Brainard unknown, it's not surprising that Powell is more focused on institutional credibility.
So, it's not entirely surprising that both Rosengren and Kaplan announced their resignation. Rosengren cited "health reasons" and will step down at the end of the week, while Kaplan said that he didn't want to become a distraction from the Fed's mission and would step down next week.
It's also not a coincidence that Powell will face questions about these activities at his next Congressional hearing which has more importance with his planned taper and President Joe Biden's looming decision on whether he will be reappointed. Many progressive lawmakers, already hostile to the Fed, have called for a ban on trading and stock ownership by Fed officials.