Fed picks vow independence, but regulatory views remain unclear

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A pair of nominees to the Federal Reserve Board vowed Tuesday to protect the independence of the agency if confirmed, amid concerns by some that President Trump may object to future central bank monetary policy.

Trump last month nominated Michael Clarida, a managing director at PIMCO and Columbia University economist, to serve as the Fed’s vice chairman, and at the same time tapped Kansas Banking Commissioner Michelle “Miki” Bowman to serve as the Fed Board’s designated member with community banking experience.

At a Senate Banking Committee hearing, Sen. Sherrod Brown, the top Democrat on the committee, pressed the nominees on their independence from the president, noting that Commissioner Bowman did not meet with Trump before her nomination, while Clarida did have such a meeting.

“Do you believe the Federal Reserve is intended to be independent from the pesident of the United States?” Brown asked.

“Absolutely,” Bowman said.

“Absolutely,” Clarida echoed. “It’s essential.”

Andrew Harrer/Bloomberg

Brown went on to ask Clarida whether he got the impression during his interview with Trump that he viewed the Fed differently.

“Let me just state definitively that I have a number of meetings over several months with a number of officials, including the president, and at no meeting, at no time, did I have any reason to question the independence of the Federal Reserve,” Clarida said.

Trump hinted last month that he may oppose future interest rate increases by the Federal Open Market Committee.

Russia and China are playing the Currency Devaluation game as the U.S. keeps raising interest rates. Not acceptable!

— Donald J. Trump (@realDonaldTrump) April 16, 2018

Sen. Robert Menendez, D-N.J., carried on the inquiry into how independent the nominees would be from the White House, asking Clarida if the president asked him how he would vote on rate increases to the federal funds rate, or whether he indicated a preference “one way or the other” for how he should approach the Fed’s benchmark interest rate.

“Absolutely not,” Clarida said.

Sen Tom Tillis, R-N.C., said the independence of the Federal Reserve’s authority over monetary policy is critical to the functioning of markets, as evidenced by recent comments by Turkish President Recep Tayyip Erdogan’s promise to exert greater control over monetary policy caused the Turkish Lira to rapidly drop in value.

“I think if you see the Turkish currency right now, maybe the markets don’t necessarily agree with that,” Tillis said. “I appreciate you all continuing to be independent on that [score].”

A significant portion of the hearing was spent elucidating the nominees’ views on bank regulation. Both nominees acknowledged that both the lack of regulation and imprudently low interest rates contributed to the financial crisis, and noted that both regulation and secular market forces had contributed to the decline in the number of community banks over the last 30 years.

Brown asked the nominees whether they would oppose any Fed proposal that “weakens leverage rules for the largest banks,” implicitly referencing the Fed’s recent proposal to modify the enhanced supplemental leverage ratio for the largest banks.

Bowman said that it was “important to understand the details” of Fed proposals so that she can be “fully informed” before taking a position. Brown went on to ask whether she would vote against the rule if she believed that it was a bad idea.

“I would feel free to vote as I felt appropriate, and if that were how I felt I would certainly do so,” Bowman said.

Sen. Elizabeth Warren, D-Mass., pressed Clarida on his views on the capital proposal. Clarida responded that he had “not studied” the proposal and would therefore reserve judgment.

“I’m sorry, this is a hearing about your becoming a Federal Reserve Board [vice] chair, and you haven’t read this proposal that would … reduce capital standards for the largest banks?” Warren responded. “You haven’t read it, and you’re telling me you don’t have an opinion about it?”

“Senator, I’m aware of it in broad ways; I have not studied it in detail,” Clarida said.

“Let me try this another way,” Warren continued. “Why on earth would this be the time to reduce capital for these too-big-to-fail banks?”

“I take the thrust of your observation, and I think that if I were confirmed, I would certainly come to the issue with an open mind,” Clarida said. “But as I said, my priority would not be to sacrifice any of the gains we have achieved with the existing policies in place.”

While the nominees hearing was not entirely without drama, the questioning they faced pales in comparison with the grilling that Democrats — and some Republicans — gave Federal Reserve Board nominee Marvin Goodfriend in January. Democrats spent much of the hearing — in which Goodfriend appeared alongside Jelena McWilliams, the president’s pick to chair the Federal Deposit Insurance Corp. — assailing Goodfriend for his views on deposit insurance, inflation and unemployment.

Goodfriend’s nomination has been stalled for months behind united Democratic opposition and the opposition of Sen. Rand Paul, R-Ky. A Paul spokesman said last month that the Senator “continues to believe that auditing the Federal Reserve is a priority and will support nominees who share that interest.”