Fed Chair Powell orders review after Fed members report big investments

Yahoo Finance's Brian Cheung breaks down what caught Fed Chair Powell's eye.

Video transcript

SEANA SMITH: We're going to turn to another big story, and one that our Fed reporter Brian Cheung is following very closely, Fed Chair Jay Powell ordering the review of the Fed's rules around stock trading. Now this comes after a story that we covered earlier in the week. A couple of senior policymakers, they disclosed several large transactions. So Brian, I guess, what does this mean, just in terms of what the Fed could potentially do going forward? Because it has the potential to be pretty significant.

BRIAN CHEUNG: [AUDIO OUT] ethics rules are in the news, probably not a good thing. All of this having to do with the revelations that we got earlier in the month, first reported by "The Wall Street Journal" and then by Bloomberg, disclosing a number of multimillion dollar transactions being done over the course of 2020 by Dallas Fed President Robert Kaplan, covering individual stocks like Apple, Facebook, Verizon, which is actually Yahoo's former parent company, in addition to, in some cases, a floating rate bond ETF. And then you have the Boston Fed President Eric Rosengren, who has disclosed he had several transactions in separate real estate investment trusts.

Now, both of those Fed presidents said that they would be selling those positions by the end of the month, and would not be engaging in any more trading under those accounts, at least during the time that they will remain presidents of their respective Federal Reserve banks. But now we're hearing from the Federal Reserve chairman, who apparently said last week that he would be interested in having the board "take a fresh look," is the way that they described it, at the ethics rule around permissible financial transactions and holdings by senior Fed officials. I want to read to you an excerpt from this statement from a Fed spokesperson, saying, quote, "Because the trust of the American people is essential for the Federal Reserve to effectively carry out our important mission, Chair Powell late last week directed board staff to take a fresh and comprehensive look at the ethics rules."

Now, whether or not this could change anything remains an open question. Whether or not that review will be public remains an open question. But regardless, the Federal Reserve spokesman adding later in that statement that this could lead to a tightening of rules and standards. We have to remember that the Fed board is the head that presides over the 12 Federal Reserve banks, which all have codes of conducts that, in many cases, are similar to one another. But again, never a good thing when the code of ethics is necessarily in the news cycle. We'll see that the Federal Reserve chairman is pressed on this topic when there is that press conference after the Fed's next policy-setting decision meeting. That will be next week, Seana

SEANA SMITH: It will be interesting to see if he has anything more to say about this. Brian, you mentioned the fact that we could see tighter rules in regards to this. But when it comes to the rules that could be implemented, I guess, will they be much more stringent, do you think, or is this still a little bit just too early to tell?

BRIAN CHEUNG: The challenge is that when you unpack the rules, at least at the Federal Reserve Bank level, there is a wide prohibition across ownership of any bank or depository institution. That makes sense, because the Federal Reserve is a major regulator over the banking industry. But outside of that, a lot of the Federal Reserve banks have language that say it is OK to be invested in stocks or even bonds of companies that are not tangentially related to the banking industry as long as they don't have any sort of substantial banking business, that it actually is allowed. And when there is gray area, as long as the Federal Reserve official clears it through their ethics officer, which is inside a Federal Reserve bank, not necessarily coming from the Board of Governors in Washington, DC, then it's an A-OK for them to invest in that.

Now, it's possible that you can put some sort of restriction in place that would say you can't hold stocks of any sort. Again, we'll see if the Federal Reserve wants to do that. Another way this could happen is if Congress wanted to move on that. We saw an interest from Senator Elizabeth Warren, Democrat from Massachusetts, writing a letter to all the 12 Reserve banks, saying, you should all be imposing a ban entirely on any sort of stock trading within 60 days. We'll see if that's going to happen, because this type of letter writing isn't necessarily a mandate for them. But of course, Congress does have the power to legislate that into law if they wanted to. And maybe Elizabeth Warren's letter is a hint that they might be interested in doing so, Seana.

SEANA SMITH: All right. Brian Cheung, thanks so much for breaking that down for us.