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Clarida: Stock market volatility 'not a pillar of monetary policy'

Richard Clarida, the nominee to become the Federal Reserve's next vice chairman, said May 15 that the Fed should be able to continue with interest rate plans despite volatility in the stock markets.

Clarida, a PIMCO managing director and Columbia University economics professor, testified in the Senate on his nomination in a hearing that largely focused on financial regulation. He and another nominee to the Fed from President Donald Trump, Michelle Bowman, both highlighted the need for tailoring regulations for banks appropriately.

The two made several comments on monetary policy, expressing their support for the central bank's independence, along with its dual mandate of stable prices and maximum employment. They supported the Fed's plans to trim its balance sheet and said they would prefer that the central bank ends up with only Treasurys, not the mortgage-backed securities it purchased after the financial crisis, when the effort wraps up.

Clarida also expressed skepticism on the third round of quantitative easing that was announced in 2012, saying he was not sure how he would have voted on it. The benefits of the asset purchases "diminished as more and more rounds were added," while the costs of the program went up, he said.

Asked about stock market volatility, Clarida told the Senate Committee on Banking, Housing and Urban Affairs that episodes such as the market swings earlier this year should not throw off the Fed's monetary policy plans.

On other monetary policy questions, Clarida said the country's 3.9% unemployment rate is a welcome development but "behind that one number is a very, very complex picture" such as how technological changes might be affecting the labor market. That, he said, is why the Fed should be looking at broader measures of the labor market beyond the headline jobless rate.

The Fed, he added, should "keep the economy as close as it can" to meeting its maximum employment goal to help boost wage growth, which has been growing modestly despite increasingly tight labor markets.

Much of the hearing focused on whether efforts to review the post-crisis regulatory framework are appropriate.

Bowman, a fifth-generation banker who is now the Kansas bank commissioner, said she supported those efforts. Trump picked Bowman to fill a spot on the Fed's Board of Governors designated for community banking specialists.

"Although the crisis revealed weaknesses in the U.S. financial system that needed to be addressed," she said, "I have witnessed firsthand how the regulatory environment created in the aftermath of the crisis has disadvantaged community banks."

Both nominees criticized Wells Fargo for its fake-accounts scandal that led to an unprecedented penalty from the Fed. If confirmed, the two would get to vote on whether the Fed lifts the asset cap it implemented, under a move Fed Chairman Jerome Powell recently announced.

Bowman said Wells Fargo's actions were "absolutely inappropriate," while Clarida said they were "egregious and unacceptable." The two said they would need to be convinced that the issues at the bank are fixed entirely before they would support lifting the asset cap.

Clarida, meanwhile, declined to take a firm stance on a proposal from the Fed to reduce leverage requirements for the largest U.S. banks, under questioning from Sen. Elizabeth Warren, D-Mass.

Clarida told Warren he is aware of the proposal but has "not studied it in detail," leading Warren to criticize him for making it difficult for senators to judge his views on a critical issue.

He said in a separate exchange that he would seek to make regulations more efficient but that he would "need to be assured that it preserved the substantial gains" that the post-crisis framework brought about. The financial crisis, he said, is "not a lesson that I will forget."

The two would fill vacant spots on the Fed Board of Governors, which currently has four of its seven seats unfilled.

The Senate panel narrowly signed off on economist Marvin Goodfriend’s nomination to the Fed board, but his nomination has so far stalled in the full Senate.