Two Federal Reserve officials step down amid ethics questions

This is an audio transcript of the FT News Briefing podcast episode: Two Federal Reserve officials step down amid ethics questions

Marc Filippino
Good morning from the Financial Times. Today is Tuesday, September 28th, and this is your FT News Briefing.

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Two regional Federal Reserve chiefs yesterday said they’re stepping down. And central bankers around the world are gathering today virtually at an ECB forum, and the hot topic will likely be inflation. Plus, Germany’s elections are over, and now its political parties are wrangling to form a coalition government. Don’t hold your breath on that happening any time soon, though.

Ben Hall
It’s worth remembering that in 2017, it took a hundred and seventy-one days to form a government so it could run well into next year.

Marc Filippino
I’m Marc Filippino, and here’s the news you need to start your day.

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OK, so this is probably not what Federal Reserve Chair Jay Powell wants to be dealing with as he manages US monetary policy at this critical point in time, but yesterday two of his top officials announced they’re stepping down. Robert Kaplan is the president of the Dallas Fed, and Eric Rosengren heads the Boston Federal Reserve bank. Rosengren said he’s stepping down for health reasons, but the announcement comes as the two men face an investigation into their trading activities. The FT’s Colby Smith has more on what landed them in hot water.

Colby Smith
Both Kaplan and Rosengren were found to have been active investors last year in financial markets, and so Kaplan had stakes of more than one million in 27 publicly traded companies. Rosengren had smaller stakes, but he was heavily involved in some real estate investment trusts. And last year was a really unprecedented year for the US central bank. They waded into a number of markets that, you know, they really haven’t had a presence in the past. They dropped interest rates to zero. They’re buying treasuries, agency mortgage-backed securities. To that list they added corporate bonds, corporate bond ETFs, municipal bonds. For a lot of people, it was certainly eyebrow-raising to see that Fed officials were so involved in financial markets during this time.

Marc Filippino
So, Colby, what has the Fed said about this so far?

Colby Smith
Kaplan and Rosengren and the Fed itself has said that none of this trading activity went against the ethics standards set out by the Fed and had all been okayed by general counsel at the various regional banks, as well as the central bank itself. But Powell alluded last week to to the notion that some of those standards might need to be tightened in the wake of these revelations.

Marc Filippino
Colby, what do these resignations mean for the Fed’s big undertaking right now, which is managing the US economy as it emerges from the pandemic, you know, dialling back stimulus measures, tightening monetary policy and just, you know, dealing with inflation?

Colby Smith
So both Rosengren and Kaplan were both seen as pretty hawkish members of the Fed, meaning that they were hoping to tighten monetary policy a bit more quickly than I think some others on the committee. So if anything, you know, their removal is somewhat helpful for those who want a bit more of a patient approach when it comes to thinking about the policy stance. But I don’t think more broadly this is going to completely upend monetary policy decisions. One of the key decisions has already been made really about kind of the taper timeline, which Powell mentioned last week. Now, we don’t know for certain when they’re actually going to announce the reduction of that support. But we know, you know, it’s quite possible that we get that at the next meeting. Now, after that, there’s not really a policy decision to make for quite some time because the thresholds for interest rate increases are just significantly more stringent than they were for tapering. So any decision on interest rates is quite a ways off, meaning that there is some time to sort through some of these personnel issues.

Marc Filippino
Colby Smith is the FT’s US economics editor.

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Now, amid all that Federal Reserve drama, Fed Chair Jay Powell is today meeting other central bankers from around the world at a forum. It’s hosted by European Central Bank president Christine Lagarde, and all these folks are dealing with how to dial back pandemic stimulus measures, and the FT’s Martin Arnold says the big topic for all of them is inflation.

Martin Arnold
They’re still sticking to the line that they think a lot of what’s driving inflation this year is temporary, and it’ll fade next year. That’s certainly the line that we’ve heard from Christine Lagarde talking about this yesterday when she appeared for her regular appearance in front of the European Parliament. And MEPs were asking her about inflation, about electricity prices, gas prices, which have shot up in Europe this year. And her answer to this continues to be that a lot of the factors driving higher inflation are temporary, and the ECB expects them to fade next year. But she did say there are upside risks that some of these price pressures could continue into next year, particularly if some of these supply chain bottlenecks that we’ve seen continue into next year. And also they’re watching very closely at the ECB to see if there’s any sign of so-called second round effects whereby workers start to demand higher levels of wages in response to the higher cost of living that we’re seeing. And if that starts to happen, you could see a price spiral, which would be very worrying for central bankers as it’d mean they’d have to start to think about tightening policy, perhaps more drastically and suddenly than they would otherwise like to do.

Marc Filippino
Martin Arnold is the FT’s Frankfurt bureau chief.

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Germany’s nail-biter of an election is over, and the country’s Social Democratic Party has won by a hair, barely beating out Angela Merkel’s long-ruling party, the Christian Democrats or CDU. But it’s still unclear who will be the next chancellor. What is clear is there’s a lot of wrangling going on as political parties try to form a coalition government. I’m joined by our Europe editor, Ben Hall, now to talk about what’s next for Germany. Hey, Ben.

Ben Hall
Hello.

Marc Filippino
So, Ben, what’s happening with coalition talks right now?

Ben Hall
So at the moment, the SPD and the CDU are both claiming to have a kind of mandate to lead negotiations, their preferred formation. And in the meantime, the Greens and the FDP, the Liberals, have decided to get together themselves and to try and bridge their differences before even talking to the other two bigger parties.

Marc Filippino
So, Ben, what are the most likely alliances that could result from this? I understand there could be some colourful configurations.

Ben Hall
Well, we’re probably looking at either of two, three-way coalitions. One is known as Jamaica because it’s the colours of the Jamaican flag. So it would be the CDU, which is black; with the CSU, which is their Bavarian counterparts; the Greens, who are green; and the FDP, who are gold. So the other formulation is what’s known as traffic light. So it’s gold for the Free Democrats, green for the Greens and red obviously for the Social Democrats.

Marc Filippino
Very illustrative, Ben. I like I like those visuals. So tell me a little bit about the man who leads the winning party, Olaf Scholz.

Ben Hall
So Scholz is a moderate in the social democratic spectrum. He is cautious, quite orthodox on the public finances. And he’s definitely emulated Angela Merkel’s sort of leadership style — careful, steadfast, unflashy. And Germans seem to lap it up during the campaign. And it’s one of the reasons why the SPD essentially outperformed expectations.

Marc Filippino
Now, how long will it take before they agree on a new government? Could it be soon?

Ben Hall
Well, the main parties vowed to try and complete coalition talks by Christmas. It’s worth remembering that in 2017, it took a hundred and seventy-one days to form a government so it could take it could run well into next year. There is a sort of determination, particularly on the side of the smaller parties, to sort of set the terms of the next coalition. And in a way, the bigger parties will have, to a large extent, go along with that. So the real question is, is whether the Liberals and the Greens can bridge their quite considerable differences. And the good thing is, is they’re sort of setting about that right now. So that suggests that they are quite serious about it.

Marc Filippino
Ben Hall is the FT’s Europe editor. Thanks, Ben.

Ben Hall
Thank you.

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Marc Filippino
And before we go, Hollywood could see a big talent merger soon. One of Tinseltown’s most powerful firms, Creative Artists Agency, said it’s acquiring its rival talent agency, ICM. If it goes through, it will be the first big tie-up of talent agencies since William Morris merged with Endeavor back in 2009. This deal will bring CAA’s clients like Scarlett Johansson and Beyoncé under the same roof as Samuel L Jackson and Olivia Colman. And it comes at a time of sweeping change for the entertainment industry, largely brought on by streaming. The financial terms of the deal were not disclosed.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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