The Fed is still conflicted

The Fed is still conflicted

Welcome back. Today’s letter consists of a draconian (but I think correct) suggestion about monetary policy, followed by a little light bitcoin scepticism. Food for thought, I hope, for a sunny autumn weekend. Email me: [email protected]

The Fed is still conflicted

It is good that senior Federal Reserve officials will no longer be allowed to own individual investment securities or derivatives, or to trade their portfolios actively. Here is what the Fed said about this on Thursday:

Not letting people who know about Fed rate policy deliberations trade actively is a good idea because stocks and bonds are sensitive to rate policy, and if officials started front-running Fed policy decisions, that would be acutely embarrassing. It is odd that rules like this were not in place until now.

The reason things have changed is that the heads of the Dallas and Boston Fed banks were trading individual stocks quite actively last year. Eric Rosengren, the Boston president, had significant investments in mortgage real estate investment trusts. This is especially bad because the Fed, as part of quantitative easing, buys the very mortgage-backed securities that mortgage Reits invest in. More broadly, mortgage Reits are very sensitive to interest rates, which the Fed influences. Worse, Rosengren