May 15, 2018 / 3:09 PM / 4 months ago

UPDATE 2-Trump Fed nominee signals skepticism on QE

(Recasts, adds Clarida’s comments on QE, background)

By Ann Saphir and Lindsay Dunsmuir

May 15 (Reuters) - Even as U.S. Federal Reserve Board nominees Richard Clarida and Michelle Bowman on Tuesday pledged their best efforts toward achieving the U.S. central bank’s twin goals of full employment and low inflation, one appeared hesitant on a key Fed tool used in the past to attain them.

“I will support monetary policies that take a balanced approach to achieving (the Fed’s) important objectives,” said Clarida, an economist who advises fund manager Pimco, at the start of a nomination hearing before the Senate Banking Committee.

But asked about the Fed’s bond-buying programs, known as quantitative easing, Clarida sounded skeptical.

It was among few points of contention in what was largely a drama-free hearing for both nominees, in contrast to the hearing of President Donald Trump’s other pending pick for the Fed, Marvin Goodfriend, whose nomination has since stalled in the Senate.

Though the initial program “made sense,” Clarida said he was not sure how he would have voted on subsequent rounds. “I do believe that the benefits of QE diminished as more and more rounds were added, and that the cost of QE went up.”

The Fed’s bond-buying programs, controversial particularly among Republican members of Congress, began in the depths of the crisis to stabilize banks and the financial system, and were expanded during the recovery to help bring down high unemployment and lift too-low inflation.

Most current Fed officials and its past two chairs believed the bond-buying programs helped keep the recession from being even worse than it was, and say that in a future crisis the Fed may need to resort to it again.

Speaking to Republican Senator Pat Toomey, a strong opponent particularly of the Fed’s third round of bond-buying begun in 2012, Clarida said, “I am very sympathetic to your view that any discussion and thinking about QE would have to take a serious look at costs as well as benefits.”

Trump’s other nominee, Bowman, declined to comment on past decisions over QE, but said she did agree that trimming the Fed’s $4 trillion balance sheet - a process it began last October and expects to continue for another couple of years - is “the appropriate path forward.”

The two nominees will, if approved, join Trump’s other two mainstream picks, Jerome Powell and Randal Quarles, in largely filling out the remaining spots on the influential Fed Board of Governors.

Each staked out slightly different priorities on regulation, with Bowman - who said her family has been in community banking since her great great grandfather helped found Farmers and Drovers Bank in 1882 - saying that some rules put in place after the financial crisis put small banks at a disadvantage.

“I will bring this perspective to my work at the Board to ensure that rules preserve the resiliency of the financial system, but are appropriately tailored to the size, complexity, and risk of an institution,” she said.

Clarida also said he wanted regulations to be tailored “appropriately,” but added he would want to do so without “putting the system at risk in an unnecessary way.”

Reporting by Lindsay Dunsmuir and Ann Saphir; Editing by Chizu Nomiyama and Andrea Ricci

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