Clarida assured U.S. senators at his confirmation hearing Tuesday that “at no time” did anyone in the administration ever try to influence the Fed or ask him to vote one way or another on interest rates.
Trump said in interviews with the Wall Street Journal last year that he prefers low interest rates to help spur economic growth. Kevin Warsh, who was shortlisted for Fed chair in the fall, said he also met with the president, who questioned him extensively about his views on interest rates. Warsh told Politico recently that maintaining the Fed's independence is “probably not an obvious feature to the president.”
The Fed is in the process of raising interest rates now that unemployment is on track to hit the lowest level since the 1960s, and growth and inflation show signs of picking up. Clarida stressed he would take a “balanced approach” to monetary policy, an indication that he isn't planning to push the Fed to hike rates any faster. The Fed is planning two more interest rate increases in 2018.
Clarida is a widely respected economist with extensive experience in research, government and the private sector. A Republican, he served as senior staff economist in the Reagan administration and as an assistant treasury secretary in the George W. Bush administration. He is expected to be a strong No. 2 to Fed Chair Jerome H. Powell, who is a lawyer and does not have a PhD in economics. Several of America's most prominent economists, including former Fed chair Ben Bernanke and former Fed vice chair Stanley Fischer, wrote a letter urging senators to confirm Clarida.
“Trump's Fed nominees are higher caliber,” said Gus Faucher, chief economist at PNC Bank. “They understand the importance of having an independent Fed.”
Clarida testified Tuesday before the Senate Banking Committee alongside Bowman, who is Trump's pick for the Fed governor role that oversees community banks.
Both nominees indicated they do think some bank regulations could be scaled back, especially for smaller community banks. But they were careful to stress that they believe the financial system is stronger today than it was before the 2008-2009 financial crisis, largely because of additional regulations.
“If I am confirmed, my priority will be to support policies that are effective, efficient and appropriately tailored, and that 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,” Clarida said.
Trump has an almost unprecedented chance to remake the Fed with his own nominees. Only three of the seven Fed board positions are filled, a situation that Powell has warned will make it difficult for the Fed to do everything it needs to do. Trump has nominated Clarida, Bowman and economist Marvin Goodfriend to fill three more of the open seats. Goodfriend had a rough confirmation hearing and his candidacy is in doubt after all of the Democrats on the banking committee voted against him, and Sen. Rand Paul (R-Ky.) said he won't support him if he comes up for a vote in the full Senate.
Clarida and Bowman might be confirmed by the Senate before the next Fed meeting on June 12, but that is a tight deadline at a time when the Senate has a long backlog of nominees to confirm for various roles. In the past, Fed nominees have typically received bipartisan support.
Bowman — a Republican who was a staffer for former senator Bob Dole (R-Kan.) — is less well known in monetary policy circles. She is the Kansas State Bank Commissioner and spent several years working at Farmers & Drovers Bank, a community bank in rural Kansas.
She has been clear that she believes some aspects of the Dodd-Frank financial regulations are too onerous for small banks.
The decisions Fed officials make about interest rates and financial regulations affect just about everyone in the country. A growing number of economists and traders think that another U.S. recession is likely to occur by 2020 and that the Fed will probably be a major cause of any downturn.
According to a Bank of America Merrill Lynch survey of several hundred fund managers released Tuesday, 41 percent predict a recession in 2019 and 43 percent predict a recession in 2020.
The Fed is raising rates in a bid to keep the economy from overheating, but the survey found the biggest worry is the central bank will hike rates too quickly, triggering a recession because it would cause consumers and businesses to stop borrowing money to invest and grow. Concerns about the Fed have outpaced fears of a trade war, the survey found.
“We're in a transition period for the Fed, which increases the possibility of the Fed making a misstep,” Faucher said.