For several years, I have been critical of Federal Reserve policy since the 2008 financial crisis maintaining near-zero interest rates even as the central bank’s balance sheet has risen to over ten times what it was on Lehman Day. Why were Fed decision makers not sensitive to the growing income inequality that resulted?
A new clue arrived last week following disclosure that two regional Federal Reserve Bank presidents have been active traders in specific stocks even as they were making crucial decisions that affected prices of those companies. Obviously, if Fed officials can correctly anticipate the next steps in monetary policy — because, after all, they help set them — they can better decide how much of their assets to allocate to equities and when. Not surprising that the inability of low-income wage earners to profit from such investments would be less of a policy concern for them!
One of the regional bank Presidents, Robert Kaplan of the Dallas Fed, made several trades of at least $1 million each during 2020, owning individual positions in Apple, Facebook and Chevron. With the stock market surging after the Fed boosted its balance sheet since March last year, he must have done very well indeed.
The other regional bank President, Eric Rosengren of the Boston Fed, a critic of speculative risk building in the real estate sector, was himself an investor in four real estate investment trusts, making several sales and purchases. Did he time the entries and exits based on what he knew would be the Fed decisions? We do not know the answer.
While Kaplan and Rosengren will sell their individual holdings by September 30, they will still be able to invest in index funds which — you guessed it! — will benefit from Fed policy that has been oriented toward boosting equity valuations. They promised not to trade positions in the future but, presumably, they will get to keep the financial market profits they made in 2020 and so far in 2021.
Why not require Fed members to invest personal assets only through a blind trust that would not be affected by prior knowledge of central bank policy? It would be a fair way to participate in setting monetary policy. If that is not acceptable, the officials always have the option of leaving the central bank to focus on personal investments. Even after the recent Kaplan and Rosengren disclosures, Fed officials will not be required to create blind trusts.
If Fed members do not want to entrust their assets to managers of blind trusts, they should be allowed to invest only in bank deposits. Such a move would give them a better appreciation for the plight of wage earners earning zero interest rates without having the resources to participate in the stock market. It may also encourage Fed members to take steps to alleviate income inequality that has worsened over the past decade.
If you find it offensive that Fed officials’ investments should benefit from their positions at the central bank, their justification is just as insulting. Their defense is that all the investment decisions were made “within guidelines”. I cannot justify picking your pocket by asserting that my personal ethics permit me to do so!
Dr. Komal Sri-Kumar
President
Sri-Kumar Global Strategies, Inc.
Santa Monica, California
srikumar@srikumarglobal.com
@SriKGlobal
September 11, 2021
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Policy makers have to maintain a High ground undoubtedly. It does bring a constraint in managing their personal wealth which is highly sensitive to actions of central Bank and which reflects almost immediately in capital values.