Written exclusively for InTouch Capital Markets
15th May 2018
By Steven K. Beckner
Nothing terribly revealing emerged from Tuesday’s confirmation hearing for two of President Trump’s nominees to fill seats on the short-handed Federal Reserve Board.
Richard Clarida, nominated to succeed Stanley Fischer as vice chairman, told the Senate Banking Committee he “absolutely” believes interest rate normalization must continue, but was not specific about the federal funds rate level. He vowed to “work closely” with Chairman Jerome Powell and supported the “balanced approach” to monetary policy the FOMC has enunciated since 2012. Namely it “seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee’s assessments of its maximum level.”
While aiming for price stability, Clarida said “the Fed’s focus should be on getting that unemployment rate at a level that is, on average, consistent with a healthy labor market…” Pressed on why wages aren’t growing faster, the Columbia University Professor and Pimco executive said “wage growth will be a function of the growth of the economy; it will be a function of productivity, of technology; there are a number of factors. I think what the Fed can do is keep the economy as close as it can to that full employment mandate that Congress has given it.”
Banker Michelle Bowman, also nominated to fill one of four Board vacancies, said the “maximum employment” mandate is “very important.”
Both said the Fed should aim for an “all-Treasuries” portfolio as it shrinks its balance sheet. They denied they had come under political pressure or been asked by Trump how they will vote on rates. “Absolutely not!” Clarida asserted.
The two are expected to win confirmation, but a third nominee Marvin Goodfriend faces tougher sledding.
Meanwhile, San Francisco Federal Reserve Bank President John Williams, who will succeed William Dudley as New York Fed chief next month, said the Federal Open Market Committee’s projections of “three to four rate increases this year and further gradual rate increases over the next two years” is “the right direction for monetary policy.”
Williams suggested the funds rate will be capped by “an incredibly low” real equilibrium short-term interest rate (r*), which together with the 2% inflation target forms the estimated longer run “neutral” funds rate. He said he doesn’t share others’ optimism that r* will rise significnatly. Pointing to slow productivity growth and other factors, he said, “the longer-run drivers still point to a “new normal” of a low r-star and relatively low interest rates.”
The 10-year note yield rose near 3.07% in Treasury bond trading, but far from being worried, Dallas Fed President Robert Kaplan said higher long-term rates give the FOMC “more operating room.” St. Louis Fed President James Bullard continued to voice an opposite concern — a potential yield curve inversion.