ROBERT KAPLAN had a busy 2020. As a voting member of the Federal Reserve’s monetary-policy committee, he participated in its decisions to ramp up stimulus. As head of the Dallas Fed, he made two dozen public appearances, speaking at chambers of commerce, think-tanks and conferences. And as a wealthy individual, he traded millions of dollars’ worth of stocks in companies from Apple to Chevron. On September 27th, amid growing questions about the propriety of such activity for a Fed official, Mr Kaplan announced his resignation. The focus on his trading, revealed in his annual financial disclosure, risked becoming a distraction for the central bank, he said. He was not alone. Eric Rosengren, president of the Boston Fed, resigned on the same day, under the same cloud. His trading was less hefty than Mr Kaplan’s, with most of his orders valued at less than $50,000. But he had invested in trusts that held mortgage-backed securities at around the same time that the Fed was buying such assets. Mr Rosengren said he was stepping down for health reasons. At a press conference on September 22nd Jerome Powell, the Fed’s chairman, had voiced his displeasure but stopped short of censuring his two colleagues. Their investments had been judged by ethics officers to be consistent with the Fed’s rules. They did not, for example, buy stocks in banks supervised by the central bank. And they did not trade within a ten-day window before rate-setting meetings. It was also hardly the first time that Fed officials, many with backgrounds in finance, have disclosed big investments. Critics have never much liked that. But the Fed’s outsized role in markets in response to the covid-19 pandemic has forced the issue. At best, active trading looks unbecoming for central bankers tasked with safeguarding the economy. At worst, there are questions about whether Fed officials might benefit from private information or whether their personal portfolios might influence their policy thinking. Other central banks might face similar quandaries. The Bank of Canada, for instance, permits employees to invest in a wide range of assets, restricting just higher-level staff from holding shares in financial firms. The Bank of England is similarly relaxed, though it does require its staff to obtain approval before trading securities. The Fed, arguably, is already more accountable: the trading activities of Messrs Kaplan and Rosengren were self-reported in their annual disclosures, available to journalists by email. Mr Powell has vowed that the Fed will tighten its ethics rules after a thorough review. Yet it is hard to see how to avoid the appearance of conflicts of interest with just about any investing. As Mr Powell said, he had owned municipal bonds for years partly because they were deemed a safe asset for Fed officials, with the central bank unlikely to buy them. But last year he helped guide the Fed to rescue the muni market when it came under stress. Blind trusts, invested across a wide range of index funds and asset classes, might be the best solution. Any self-respecting central banker should also know that such passive strategies are, on average, likely to outperform active portfolio management. ■
