Fed watchdog: Top officials did not break law in trading scandal probe

The Federal Reserve's government watchdog on Thursday cleared two top officials of any wrongdoing in a financial market trading scandal that rocked the central bank last year.

Why it matters: It was the biggest ethical scandal in the Fed's history, which drew ire from lawmakers and raised questions about how top economic policymakers can benefit from the policy they set.

What's new: Trading activities by Fed chairman Jerome Powell and then-vice chairman Richard Clarida, the second most powerful position at the central bank, "did not violate the laws, rules, regulations or policies," according to a memo by the Office of Inspector General, which conducted the investigation.

• Investigations of then-Federal Reserve Bank presidents Eric Rosengren (Boston) and Robert Kaplan (Dallas) — whose financial disclosures showed they were trading assets in 2020 that would have benefited from the Fed's financial market rescue — are still ongoing.
• Both officials resigned shortly after their disclosures came to light.

Catch up quick: In late February 2020, Clarida bought stocks on the eve of an announcement that the Fed stood ready to prop up financial markets and the economy as the coronavirus arrived in the U.S. The Fed said the trade was part of routine portfolio rebalancing.

• But an amended disclosure — uncovered by the New York Times in January of this year — showed that he sold a similar amount of money in the fund just days earlier, raising questions about whether Clarida's trades were less routine and more strategic.
• A spokesperson for Clarida maintained the activity was part of rebalancing.

A financial advisor to Powell's financial trust made five trades in December 2019 during a so-called "blackout period," where Fed officials are barred from making trades, the memo says — but the watchdog found no evidence that Powell had any knowledge the transactions were executed during this period.

What they're saying: "I am gratified by the conclusions of the Federal Reserve's Office of Inspector General, which finds that I went above and beyond financial ethics and disclosure requirements during my tenure as Vice Chair," Clarida said in a statement.

• "I have always been committed to conducting myself with integrity and respect for the obligations of public service, and this report reaffirms that lifelong commitment to exceeding ethical standards."
• Clarida was already set to leave the central bank, though he departed two weeks earlier than planned.
• Clarida's spokesman said the early departure had nothing to do with the trading activity disclosure coming to light, but rather to begin teaching at Columbia University for the spring semester.

Flashback: The Fed asked its watchdog back in October to initiate an independent probe to see whether trading activity by senior officials was in compliance with its ethics rules and the law.

• The office conducted interviews, reviewed emails, brokerage statements, trading data and more.
• The Fed also revamped trading rules for policymakers and senior staff, who are now banned from buying individual stocks and restricted from actively trading.
• The new rules took effect this month. Some lawmakers say the changes don't go far enough.