Does the Fed have an ethics problem?

• Key Insight: Even though ethics violations among Fed officials are uncommon, high-profile cases like that of former Fed Gov. Adriana Kugler highlights persistent questions about oversight effectiveness.
• Expert Quote: “When you’re in a position that’s as influential as working at the Federal Reserve, you’re governed by the law of Caesar’s wife — be above suspicion.” — Alex Pollock, senior fellow at the Mises Institute.
• What’s at stake: The Federal Reserve unveiled new reporting requirements in 2022 for members of the FOMC. The recent Kugler controversy has raised questions about whether the rules are actually working.

The Federal Reserve has been rocked in recent years by a number of high-profile trading scandals, leaving some to question whether the central bank has an endemic ethics problem that it is struggling to contain internally.
Stakeholders interviewed differ on whether there are actual oversight lapses or whether attention to such cases is simply heightened when Fed officials are involved. But what is clear is that these incidents can undermine public confidence in the central bank.

“When you’re in a position that’s as influential as working at the Federal Reserve, you’re governed by the law of Caesar’s wife — be above suspicion,” said Alex Pollock, a senior fellow at the Mises Institute.

The most recent scandal to make headlines was the revelation that former Fed Gov. Adriana Kugler violated the central bank’s ethics rules and was subject to an internal probe before her abrupt departure in August. Financial disclosures show previously undisclosed trades in multiple individual stocks in 2024, some of which occurred during the Fed’s blackout period, a violation of the agency’s ethics rules.

Other Fed officials embroiled in financial-related scandals in recent years include Atlanta Fed President Raphael Bostic, Boston Fed President Eric Rosengren and Dallas Fed President Robert Kaplan. Both Rosengren and Kaplan were cleared of legal wrongdoing by the central bank’s internal watchdog, but they were criticized for eroding the public’s trust. An investigation into Bostic found no violation of federal insider trading laws, but did reveal that he failed to disclose his holdings in a timely manner.

Mayra Rodriquez Valladares, a financial risk consultant, said that despite these instances, ethical malfeasance is rare at the Fed and not systemic.

“We have to remember these are three or four people out of how many thousands who work for the Fed system,” she said. “This is not part of the culture in the Federal Reserve; this is not pervasive behavior that is going on.”

Valladares added that there are many more examples of members of Congress engaging in similar activity, noting that rules should be written to “prohibit them from committing flagrant insider trading.”

Following the Rosengren and Kaplan scandals in 2020, the central bank implemented more stringent reporting requirements that limit certain investments.”These tough new rules raise the bar high in order to assure the public we serve that all of our senior officials maintain a single-minded focus on the public mission of the Federal Reserve,” said Fed Chair Jerome Powell in 2021. 

But stakeholders have questioned whether these measures have had any meaningful impact. Aaron Klein, a senior fellow at the Brookings Institution, called the Fed’s ethics system “rotten to the core,” saying the central bank has failed to fix underlying issues despite the new requirements.

“If the Fed regulates banks the way it regulates senior officials for ethics, then God help us all,” Klein said.

Klein added that the Fed’s new ethics standards require senior officials to disclose their financial information monthly, and questioned how Kugler’s missing or incomplete disclosures could have slipped through.

“So was Kugler not submitting the information, or was the information not checked?” he said. “The Fed has never answered either question.”

The Federal Reserve requires members of the Federal Open Market Committee to give 45 days’ notice before buying or selling any securities. If a purchase occurs, committee members must disclose it within 30 days.

The agency’s inspector general launched an investigation into Kugler earlier this year that is ongoing.Regardless of whether these issues are pervasive, market watchers agree that instances of financial impropriety harm the Fed’s credibility.

“There’s a high standard that some may think is not fairly placed on Fed officials, but overall it’s important because these individuals are making decisions that impact monetary policy,” said Pollock.

Valladares said there should be more oversight and stricter rules for anyone who works at a bank regulatory agency, including the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, to prohibit trading in bank-related stocks or bonds. But whatever rules are in place, it is equally important that those rules are effectively implemented and enforced, she said.

“The problem is you can have all the rules you want, but the question is how do said rules really get enforced,” Valladares said.