Clarida, Bowman Affirm Commitment to Fed's Independence in Setting Rates -- 2nd Update

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05/15/2018 | 08:39 pm

By Nick Timiraos

WASHINGTON -- Two of President Donald Trump's nominees to the Federal Reserve's board of governors Tuesday signaled a strong commitment to making policy decisions independently of the executive branch.

Richard Clarida, the economist tapped to serve as the central bank's No. 2 official, told lawmakers he had never been pressed by the president or other officials on how he would set interest rates.

"In no meeting, at no time, did I ever have any reason to question the independence of the Federal Reserve, absolutely not," Mr. Clarida told the Senate Banking Committee at his confirmation hearing.

Democratic lawmakers pressed Mr. Clarida and a second nominee, Kansas Bank Commissioner Michelle Bowman, to state they would resist political interference.

Mr. Trump criticized the Fed during his presidential campaign but hasn't publicly weighed in on the central bank's interest-rate increases since taking office.

Mr. Clarida, if confirmed by the Senate, would work closely with Fed Chairman Jerome Powell in shaping monetary and regulatory policy. But the hearing yielded few clues on the likely outcomes.

In response to questions, Mr. Clarida said stock-market volatility by itself shouldn't influence the Fed's rate-setting decisions.

He also said it would be important for Fed officials to consider a broader range of labor-market measures than just the unemployment rate, which at 3.9% suggests there is very little slack.

"The economy is changing," said Mr. Clarida. The 3.9% rate "is welcome, but behind that one number is a very, very complex picture." He said Fed officials consider other measures such as labor-force participation rates.

Historically low participation rates in recent years have suggested more potential slack in the labor market than the unemployment rate indicated.

Mr. Clarida is a Columbia University economist and adviser to Pacific Investment Management Co. He served in the Treasury Department during the George W. Bush administration. He is generally considered more of a pragmatist than an ideologue.

Former Fed Chairman Ben Bernanke and three other leading economic policy makers appointed by presidents from both parties endorsed Mr. Clarida's nomination in a letter to the top Republican and Democrat on the banking committee Monday.

Mr. Clarida defended the regulatory architecture designed after the 2008 financial crisis, including from the 2010 Dodd-Frank legislation. Republicans have generally supported efforts to roll back those rules, while Democrats in some cases have said regulation should be made tougher for big banks.

The issue is ripe because the Fed recently proposed retooling capital rules and its annual "stress tests" for the largest U.S. financial firms. The changes would reduce the possibility banks would fail the tests, which examine whether firms can continue lending during a severe recession.

The Fed has separately proposed loosening a rule governing capital standards that applies to eight large U.S. banks considered crucial to the functioning of the global financial system. Regulators have been more divided over that measure.

Mr. Clarida resisted efforts to say how he would have voted on the measures, saying he would need to study the details. He said it was important to ensure any changes preserved "the substantial gains" from regulation that had made the financial system more resilient and stable.

The exchange left Sen. Elizabeth Warren (D., Mass.) disappointed. She told him she was "concerned about your unwillingness" to provide more specificity.

Lawmakers focused other questions more on monetary-policy problems of the past decade than on those that officials could face in coming years.

Under questioning, Mr. Clarida said monetary policy might have contributed to the 2008 financial crisis; in the past he has said failures in regulation and bank supervision were primarily responsible.

The confirmations of Mr. Clarida and Ms. Bowman appeared on track after the hearing, though it could be several weeks or months before they would join the Fed board.

"If I had my way, we'd be moving [Mr. Clarida] next week, but again, we're facing a phenomenally difficult time moving nominees" on the Senate floor, said the banking committee chairman, Mike Crapo (R., Idaho), after the hearing.

Typically, nominees try not to make waves at confirmation hearings, and Tuesday's wasn't particularly adversarial. That wasn't the case in January, when another Fed board nominee -- Carnegie Mellon University economist Marvin Goodfriend -- left Democrats visibly frustrated with his answers to their questions.

Republicans have a 51-to-49 majority in the chamber and nominees are confirmed with a simple majority. The GOP's majority is delicate due to the absence of Sen. John McCain (R., Ariz.), who is being treated for brain cancer.

Mr. Goodfriend's nomination fell into doubt after Sen. Rand Paul (R., Ky.) said he would vote against it, citing his concerns over the economist's academic writing about tracking cash as it moves in and out of banks.

The banking committee approved Mr. Goodfriend on a party-line vote, but his nomination hasn't come up before the full Senate.

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