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

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05/15/2018 | 05:55 pm


By Nick Timiraos



WASHINGTON -- A hearing before the Senate Banking Committee on Tuesday offered investors and the public more detail about how the Fed will take shape under its new chairman, Jerome Powell.



Mr. Powell wasn't a witness, but the economist nominated to serve as his No. 2, Richard Clarida, faced questions that could shed more light on how the Fed approaches a series of puzzles facing monetary-policy authorities.



Chief among those puzzles are how the Fed will react to a burst of fiscal stimulus over the coming years, whether the central bank will move policy from a neutral setting designed to neither spur nor restrict growth to one aimed at slowing the economy so it doesn't overheat, and how the Fed might deal with the next recession.



Kansas Bank Commissioner Michelle Bowman, nominated to become a Fed governor, also testified at the confirmation hearing.



Lawmakers pressed both nominees about whether they believed the Fed's policy-making process should be independent from influence from the White House, and both said it should.



Mr. Clarida, who interviewed with President Donald Trump before being nominated, said none of his interactions with the White House had offered any reason for him to question the administration's commitment to the traditional independence the Fed has enjoyed in monetary-policy decisions.



"In no meeting, at no time, did I ever have any reason to question the independence of the Federal Reserve, absolutely not," said Mr. Clarida.



He also said stock-market volatility by itself shouldn't determine how the Fed makes its rate-setting decisions.



Mr. Clarida has written and spoken extensively on a range of monetary-policy matters. For example, he was early among commentators to note that interest rates were likely to remain lower for longer, even once they reached a neutral setting. This was former Fed Chairwoman Janet Yellen's position during her four-year term leading the central bank until February.



And he has written with some sympathy about the possibility of adopting a price-level target to replace the Fed's 2% inflation target. A price-level target could allow inflation to run above that level for some time to make up for periods when it runs below.



Mr. Clarida's answers to these questions and others could provide more clarity about the Powell Fed because the central bank chairman typically crafts strategy with the vice chairman and the New York Fed president. Mr. Powell would rely on his top lieutenants -- Mr. Clarida and incoming New York Fed President John Williams -- to help shape policy.



Mr. Clarida is well regarded by economists on both sides of the aisle. Former Fed Chairman Ben Bernanke and three other former leading policy makers endorsed Mr. Clarida's nomination in a letter to the top Republican and Democrat on the banking committee Monday.



Because Mr. Clarida has such a voluminous public record, there is plenty of grist for questions on his views and record. In contrast, Ms. Bowman has less of a public paper trail, especially on monetary policy.



Ms. Bowman previously worked at her family's community bank in Council Grove, Kan. She has been tapped to fill a seat reserved for a community banker or community-bank regulator.



Mr. Clarida defended the financial regulatory architecture created in response to the 2008 financial crisis, including by the 2010 Dodd-Frank legislation.



Mr. Clarida said he supports efforts to tailor financial regulation but said policies should "preserve the far greater resiliency and stability of the financial system that has been achieved as a result of the significant reforms that have been put in place since the financial crisis."



In earlier work, Mr. Clarida has said the financial crisis was a failure of supervision and regulation, and not fundamentally one of monetary policy. This position is at odds with some other leading conservative economists.



Ms. Bowman cited her role as a compliance officer at a community bank after the Dodd-Frank bill took effect and said it provided firsthand experience in the law's shortcomings. "The regulatory environment created in the aftermath of the crisis has disadvantaged community banks, " she said in prepared testimony.



Typically, nominees try not to make waves at confirmation hearings, and Tuesday's wasn't expected to be particularly adversarial. That wasn't the case in January, when another Fed board nominee -- Carnegie Mellon University economist Marvin Goodfriend -- left Democrats 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 medical 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.



In academic papers, Mr. Goodfriend has supported pushing interest rates below zero during recessions and advocated charging a fee to take cash out of banks to make negative rates more effective. He has suggested inserting a magnetic strip on bank notes to track them as they enter circulation. Mr. Paul's father, former Rep. Ron Paul, was a vocal opponent of the idea.



The banking committee approved Mr. Goodfriend's nomination on a party-line vote, but his vote hasn't come up before the full Senate. His path to confirmation would be brighter had he won over some Democrats at the January hearing.



Write to Nick Timiraos at nick.timiraos@wsj.com





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