Boston and Dallas Fed chiefs step down amid stock market backlash

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Dive brief:

  • Robert Kaplan and Éric Rosengren, the chairmen of the Dallas and Boston satellite banks of the Federal Reserve, resigned Monday, a few hours apart.
  • The two came under fire this month, when financial disclosure forms revealed they traded stocks last year while helping set monetary policy – a practice that upholds the Fed’s code of ethics but nevertheless raised concerns about potential conflicts of interest.
  • While Rosengren Cited worsening kidney condition as the reason for his resignation, Kaplan addressed the controversy head-on in a statement Monday. “The Federal Reserve is approaching a critical point in our economic recovery as it deliberates on the future course of monetary policy,” Kaplan wrote. “Unfortunately, the recent emphasis on my financial disclosure risks becoming a distraction from the Federal Reserve’s performance of this vital work. For this reason, I have decided to retire.

Dive overview:

The departures of Kaplan and Rosengren could ease the pressure on Fed Chairman Jerome Powell, who is due to testify before the Senate Banking Committee on Tuesday. Powell’s term as central bank chief expires in February, and President Joe Biden has said he will decide this fall whether to renew Powell for another term or choose another candidate.

Rosengren, whose last day at the Boston Fed is Thursday, faced mandatory retirement at age 65 in June 2022, so preparations for a transition were already underway. Nonetheless, a search committee is looking for a permanent successor, the bank said. Kenneth Montgomery, senior vice president and chief operating officer of the Boston Fed, will be the interim chairman, CNBC reported.

Kaplan, who retires on October 8, could have stayed until 2025, according to Reuters.

Each has chosen to step down without pressure from the Fed’s governing council, a central bank spokesperson told Bloomberg.

Meredith Black, the Dallas Fed’s first vice president, will serve as interim president there, delaying her own retirement plans, the bank said.

The double starts could ease pressure to raise interest rates in a federal open market committee (FOMC) – of which Rosengren and Kaplan are both members – which is also divided. Forecasts showed that nine of 18 members were in favor of a rate hike as early as 2022, according to the New York Times.

“Their exit will wipe out two of the nine other hawkish Fed officials who saw a rate hike in 2022 … and suppress important voices on financial stability issues in particular,” Krishna Guha, chief strategy officer, wrote on Monday. central bank at Evercore, in a note to clients, according to the Times.

Kaplan revealed this month that it has stakes worth more than $ 1 million in 27 publicly traded companies, funds and alternative investments, according to the Financial Times. Rosengren has listed interests of at least $ 151,000 in four real estate investment trusts.

The two pledged this month to either cash out their holdings of stocks or move them into diversified mutual funds by September 30. Calls persisted, however, for the two to step down.

Powell expressed frustration with the controversy last week. “No one in the FOMC is happy that these questions are being raised,” he said, according to Bloomberg.

“We have to make changes, and we will do it accordingly,” Powell added at a press conference, according to American Banker. “It will be a thorough and comprehensive review. We will put all the facts together and look for ways to further tighten our rules and standards. “

In its statement Monday, Kaplan defended its investment. “My securities investing activities and disclosures were in accordance with the Bank’s compliance rules and standards,” he said.

Powell, however, said he wanted “to be able to look back in the years to come and know that we have risen to this challenge and handled the situation well and that what we did made a lot of sense and protected the interest. of the public and the institution of which we are all a part, ”according to CNBC.

Another regional Fed chief, New York Fed Chairman John Williams, supported the ethics review on Monday.

“We have to have the trust of the public, we have to hold ourselves to the highest ethical standards,” and the current review will help achieve that, he said, according to the Wall Street Journal. “We’re ready to make any changes to the financial disclosure rules or something like that” because “we have to make sure people understand that we are working all the time in the public interest, and we have to have policies and restrictions to support this.

The Boston Fed, in particular, has played a leading role over the past year in at least two projects with far-reaching impact for the central bank as a whole. He administered the Main Street Loan Program, which loaned $ 17.5 billion between June 2020 and January 2021 to businesses with up to 15,000 employees or $ 5 billion in revenue. That total, however, was well below the $ 600 billion made available by the central bank. Under the program, lenders were forced to pay 5% of the borrowed money – a potential deterrent.

The Boston Fed is also teaming up with researchers at the Massachusetts Institute of Technology (MIT) to create and test a “hypothetical” central bank digital currency (CBDC).

Rosengren joined the Boston Fed in 1985 and has served as its chairman since July 2007.

“It became clear that I should aim to reduce my stress so that I could focus on my health issues and postpone my need for kidney dialysis for as long as possible,” Rosengren wrote in his letter to Powell, in which he said. revealed that he qualified for a kidney transplant in June 2020. “It is equally important for the Federal Reserve Bank of Boston and the Federal Reserve System to focus on what is important – bringing the economy back to full employment and leading through to the important work of the Boston Nurtured. “

In a statement on Monday, Powell said: “Eric has distinguished himself time and time again in more than three decades of dedicated public service with the Federal Reserve.”

“In addition to his knowledge of monetary policy, Eric has focused tirelessly on how best to ensure the stability of the financial system,” said Powell. “I will miss him and my colleagues.”

Kaplan has been head of the Dallas Fed since late 2015. He previously taught at Harvard Business School for about 10 years and was a 23-year veteran of Goldman Sachs.

Powell, in a separate statement, called Kaplan a “valued colleague” who “has been a passionate and energetic public voice on a wide range of issues.”


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