The Marriner S. Eccles Federal Reserve building in Washington, D.C., on Friday, September 17, 2021.
Stefani Reynolds | Bloomberg | Getty Images
The Federal Reserve has a big meeting next week, one that will take place in the shadow of an ethical dilemma and a political decision-making committee that is with fairly clear differences of opinion about the path ahead.
Markets largely expect the Fed to follow the two-day session with no major decisions, but only with the first but significant nod that the historically easy-to-deserve pandemic-era accommodations will soon, albeit slowly, come to an end.
"Tapering" will be the word of the day when the post-meeting statement is released on Wednesday, at which individual officials will also publish their forecasts about future interest rate developments as well as economic growth and inflation.
All of this is set against a backdrop of controversial debate: news reports for the past few days suggest that Fed officials have traded stocks and bonds that could be at least indirectly influenced by their policy decisions.
At the same time, the speeches of the past few weeks suggest a split between those who say it is time to tighten politics and those who would rather wait.
For the normally laid back Fed, the current circumstances are unusual and could lead to an interesting dynamic.
"I think it's embarrassing for the Fed. It had such a squeaky-clean reputation," said Greg Valliere, chief US policy strategist at AGF Investments, of the trade controversy, which mainly involved regional presidents Robert Kaplan from Dallas and Eric Rosengren from Boston were involved. "But I don't think it'll change politics in any way. I think it'll be the rearview mirror soon, assuming there's no other shoe to drop."
Valliere noted that the subject was Fed critics such as Senator Elizabeth Warren, D-Mass.
A question of credibility
Beyond that, however, the Fed thrives on its credibility, and some of the recent issues could detract from that.
There's the problem of market credibility – Wall Street and investors must believe that the Fed is at least largely in agreement on its monetary policy approach to setting interest rates and the related actions that affect the market. Then there is public credibility – at a time when confidence in Washington’s institutions has declined, ethical missteps only add to it and can have repercussions, especially at such a delicate time.
"The ethics here look bad. You should have known better," said Joseph LaVorgna, chief economist for America at Natixis and former chief economist for the National Economic Council during the Trump administration. "Once you lose that moral authority, that's a problem."
Rosengren, Kaplan, and any other Fed officials who traded stocks have not broken any law or policy. Indeed, that part of the criticism in some quarters is that the Fed did not do housecleaning on internal rules after the financial crisis in order to avoid conflicts that came to light during the crisis.
"Remember, they already have (trade) rules that they have imposed on banks, for example, and yet the Fed governors don't live by those rules," said Christopher Whalen, a Fed veteran and now chairman of Whalen Global Advisors . "After Dodd-Frank (post-crisis banking reform), every agency in Washington has exacerbated small conflicts like insider trading. And yet the Fed is somehow exempt from these rules? They look ridiculous."
For its part, the Fed has found that it follows the rules for other government agencies and has additional rules as well.
Jerome Powell, candidate for chairmanship of the Federal Reserve Board of Governors, shakes hands with U.S. Senator Elizabeth Warren (R), Democrat of Massachusetts, before speaking on Capitol Hill during his confirmation hearing before the Senate Committee on Banking, Housing and Urban Development testifies in Washington, DC
Saul Loeb | AFP | Getty Images
Still, a central bank spokesman said Thursday that Chairman Jerome Powell had instructed Fed officials to "re-examine the ethical rules governing eligible financial holdings and activities of senior Fed officials."
“This review will help find ways to further tighten these rules and standards. The board will make changes as necessary and any changes will be added to the reserve bank's code of conduct, ”added the official.
For the Fed, the controversy takes place against a delicate background.
The central bank is preparing to take its first steps to normalize policy after cutting policy rates to zero and doubling the size of its balance sheet through more than $ 4 trillion in bond purchases.
Fed officials are divided on policy: according to the Goldman Sachs census, six officials who have spoken publicly on reducing security purchases are for and six are against. On inflation, while Powell said he expected price pressures to subside pretty soon, at least six Fed officials, including Governor Christopher Waller, have said they expect inflation to be above the central bank's target beyond 2021 of 2% will remain.
Another complication is that Powell's term expires in February and President Joe Biden is expected to soon announce his preferred decision to lead the bank. Most on Wall Street are expecting Powell to be re-nominated, but opinion is growing that Biden will replace Randal Quarles as vice chairman of banking supervision, replacing him with Governor Lael Brainard, who is likely to have a stronger hand in banking regulation would take.
Amid all this pressure, Powell needs to make sure the Fed is getting the policy right and is able to resolve some of the recent disputes.
"The reappointment of Jerome Powell is not an accomplished fact," said Natixis economist LaVorgna. "The government will understandably wait and see how the Fed handles the cut and what the markets do. That could be the deciding factor in whether he will be reappointed."
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