Fed’s No. 2 official resigns amid trading scandal

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But in a correction to his 2020 financial disclosure, Clarida said he had sold between $1 million and $5 million in the same stock fund three days prior to buying it, indicating that he was actively trading. In the Dec. 16 note submitted to the Office of Government Ethics, he referred to the exclusion of this information as an “inadvertent error.”

The news created fresh questions on the Fed’s ethics rules just before Powell was preparing to have his confirmation hearing on Tuesday before the Senate Banking Committee. Fed board member Lael Brainard, who has been tapped to replace Clarida as vice chair, will have her hearing Thursday.

As Powell’s No. 2, Clarida had a major hand in the central bank’s interest rate decisions over the last few years, including an overhaul of its policy framework designed to put a greater emphasis on broad and inclusive employment.

“The Covid pandemic has taken a tragic human toll measured in lives lost and suffering inflicted, and in 2020 triggered a catastrophic collapse in economic activity and a surge in unemployment,” he said in a resignation letter to President Joe Biden. “I am proud to have served with my Federal Reserve colleagues as we, in a matter of weeks, put in place historic policy measures that, in conjunction with fiscal policy, steered the economy away from depression and that have supported a robust recovery in economic activity and employment since.”

Clarida’s trades came under scrutiny after Dallas Fed President Robert Kaplan and Boston Fed President Eric Rosengren came under fire for revelations that they had bought and sold stocks and real estate-linked assets in 2020 as the central bank was engaged in an extensive rescue of financial markets. Both men resigned within weeks of the firestorm.

In late October, Powell announced a major overhaul of conflict of interest rules, saying Fed policymakers and senior staff will be prohibited from active trading and will be able to purchase only diversified investment vehicles like mutual funds.

Under the new policy, central bank policymakers and top staff will have to give 45 days notice and obtain prior approval from internal ethics staff for all purchases and sales. They will also have to hold all investments for at least one year.