Bonds

Clarida traded into stocks on eve of Powell pandemic statement

Federal Reserve Vice Chair Richard Clarida traded between $1 million and $5 million out of a bond fund into stock funds one day before Chair Jerome Powell issued a statement flagging possible policy action as the pandemic worsened, his 2020 financial disclosures show.

Clarida’s trades, described in forms filed with the government ethics office, show the shifting of the funds out of a Pimco bond fund on Feb. 27, 2020, and on the same day buying the Pimco StocksPlus Fund and the iShares MSCI USA Min Vol Factor exchange-traded fund in similar dollar ranges. For the year, he listed five transactions.

The following day on Feb. 28, a Friday, at 2:30 p.m., Powell took the unusual step of releasing a statement saying the virus poses “evolving risks to economic activity.” In the same statement, Powell said the Fed was “closely monitoring developments and their implications for the economic outlook.”

The Fed announced a half percentage-point rate cut on March 3 following an emergency meeting of the Federal Open Market Committee.

“Vice Chair Clarida’s financial disclosure for 2020 shows transactions that represent a pre-planned rebalancing to his accounts,” a Fed spokesman who was speaking on behalf of the vice chair said. “The transactions were executed prior to his involvement in deliberations on Federal Reserve actions to respond to the emergence of the coronavirus and not during a blackout period. The selected funds were chosen with the prior approval of the Board’s ethics official.”

The transactions are likely to further heighten scrutiny of the ethics rules and governance of the U.S. central bank after two regional Fed chiefs announced their departures following revelations about their trading activity last year. One of the presidents, Eric Rosengren of Boston, said his resignation was due to a serious health condition.

Clarida, a former executive at Pacific Investment Management Company LLC, was visiting faculty and students at Yale University in New Haven, Connecticut, the day of the trading, and not in his office in Washington. His calendar for the month shows a single phone call with a Board member on Feb. 27 at 4:45 p.m. after the market close, as well as numerous meetings with Fed staff on prior days.

The Fed spells out clear guidelines for trading activity by policy makers. Its Voluntary Guide to Conduct for Senior Officials says “they should carefully avoid engaging in any financial transaction the timing of which could create the appearance of acting on inside information concerning Federal Reserve deliberations and actions.”

It also says that they should avoid dealings that might “convey even an appearance of conflict between their personal interests, the interests of the system, and the public interest.”

February 2020 was a time of extreme moves in financial markets as investors reacted to the threat of the global spread of COVID-19. Stocks fell steeply and bond markets were in a powerful rally.

“The pandemic was spreading quickly and the economic outlook was evolving rapidly. That was not the appropriate time for top Fed officials to be making multi-million dollar changes to their portfolios,” said Andrew Levin, a Dartmouth College professor and former special advisor to the Fed’s Board. “The Fed should welcome an external review of all financial transactions made by Federal Reserve Board members last year.”