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WASHINGTON: The Federal Reserve’s (Fed) watchdog has cleared two top officials of wrongdoing over stock trades that created an uproar, prompting several to leave their posts and led to rule changes at the US central bank.

A key focus was trading by former Fed vice chair Richard Clarida in February 2020, just as the central bank was preparing to slash interest rates to support the economy, which sent stock prices higher. Clarida resigned in January 2022, two weeks before his term was up.

Clarida said the watchdog “determined conclusively that I did not violate any statutes, rules, regulations, or standards”.

Fed chair Jerome Powell also was a target of the probe for trading by his family trust in 2019, during trading blackout periods around Fed policy meetings.

In a memo to Powell, the Office of Inspector General for the Federal Reserve Board, said “we did not find evidence to substantiate the allegations that former vice chair Clarida or you violated laws, rules, regulations, or policies related to trading activities”.

But they noted that Clarida failed to report the trades in question.

“Based on our findings, we are closing our investigation” into the pair’s investment activities from 2019 to 2021, the Office said.

The probe did not cover the activities of Dallas Fed chief Robert Kaplan or his Boston counterpart Eric Rosengren, who resigned last year amid the controversy.

The watchdog is conducting a separate review on their activities.

Critics say the officials benefited from inside information on Fed policy and interest rates.

The two officials also engaged in large stock trades in 2020, at a time when the central bank was aggressively acting to support the US economy amid the impact of the Covid-19 pandemic.

Clarida reportedly moved between US$1 million and US$5 million into a stock fund from a bond fund in February 2020, a day before Powell announced the central bank could take action as the Covid-19 pandemic worsened.

Weeks later, the Fed slashed its benchmark lending rate to zero and pumped trillions of dollars of liquidity into the financial system to keep it functioning as the pandemic caused a sharp downturn.

US stock markets plunged, but then shot up in the months to follow in a rally seen as partially fuelled by the Fed’s easy money policies.

Under new rules adopted in January, Fed officials are banned from holding individual stocks, bonds, cryptocurrencies and certain other investments, and cannot trade “during periods of heightened financial market stress.”

Better Markets, a non-profit advocating stronger financial regulation, said the report missed the mark, charging that its scope of review was too narrow and that it was not credible because the inspector general is hired by the Fed chair, rather than independently appointed.

The Fed early this year adopted an extensive set of restrictions on trading by policymakers and senior Fed staff to prevent any future issues, barring among other things any trading during periods of market stress and banning the holding of individual bonds and the purchase of individual stocks. – AFP, Reuters

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