In a recent report released by the Fed's Office of Inspector General, former regional presidents Robert Kaplan of Dallas and Eric Rosengren of Boston have come under scrutiny for their trading activities during their tenure. While the report does not accuse either of engaging in illegal activities, it raises concerns about conflicts of interest and the proper conduct of central bank officials.

Kaplan and Rosengren, who left their positions in September 2021, faced criticism over their trades, which put Federal Reserve Chair Jerome Powell, Governor Richard Clarida, and Atlanta Fed President Raphael Bostic in the spotlight. These officials were found to have engaged in market trading while also deliberating important policy matters during the early stages of the Covid-19 pandemic in 2020.

The report emphasizes the actions of Kaplan and Rosengren, concluding that their trades created conflicts of interest and raised questions about impartiality and proper conduct within the central bank. CNBC has reached out to both former officials for comments on the matter.

Kaplan, who traded millions in stocks, options, and other securities, has defended his actions, stating that they were in compliance with the standards in place at the time. On the other hand, Rosengren is faulted in the report for not disclosing multiple trades on his 2020 ethics forms. The report also notes several discrepancies in brokerage statements and trading data, particularly related to his trades involving real estate investment trusts while the Fed was purchasing mortgage-backed securities.

The report suggests that Rosengren's actions create an appearance of a conflict of interest that could cause doubt about his impartiality under FRB Boston's code of conduct. Meanwhile, although the OIG determined that Kaplan's trading activities did not violate any laws or regulations, it criticizes him for not disclosing specific information regarding the selling of stock option contracts. The report argues that this lack of transparency eroded public confidence in the impartiality and integrity of policymakers and senior staff during a critical period for the U.S. economy affected by the pandemic.

Both Kaplan and the Dallas Fed justified their limited disclosures by claiming that it was consistent with Chair Powell's reporting on his disclosure forms. However, the controversy prompted the Fed to introduce new trading rules, prohibiting officials from owning stocks, bonds, and cryptocurrencies. These changes aim to restore public confidence in the impartiality and integrity of the Federal Open Market Committee's work.

As the fallout from the watchdog review unfolds, it highlights the importance of maintaining ethical standards and avoiding conflicts of interest among central bank officials. The Federal Reserve's revamp of its trading rules serves as a step towards bolstering public trust in the decision-making process governing the U.S. economy.