In no area has President Trump differed more from his campaign rhetoric than the field of monetary policy. Yesterday Trump announced the nominations of Richard Clarida and Michelle Bowman to the Federal Reserve Board of Governors, with the former to fill the role of Vice Chair. Clarida’s nomination in particular illustrates how uninspiring Trump’s appointments have been, as he was a finalist for a Fed governorship under Obama until he withdrew his name from consideration. Interesting enough, doing so resulted in Jay Powell, Trump’s new Fed Chair, to fill the position.
Richard Clarida, a former Bush Treasury official, currently serves as a Columbia University professor and an adviser to Pacific Investment Management Co. He is a New Keynesian who has published a great deal on “Optimal Monetary Policy.” (Guido Zimmerman has an interesting QJAE article on the topic which references some of Clarida’s work.)
In terms of his policy views, he offers an interesting contrast to fellow Marvin Goodfriend – whose nomination has currently been stalled in the Senate. To Clarida’s credit, he reject’s Goodfriend’s support for negative interest rates – going so far as to question their legality for the Fed. In his advisory role at Pimco, his analysis has questioned the effectiveness of contemporary monetary activism. As he co-wrote in a June 2016 analysis:
In recent years we have described “riding a wave” of central bank interventions, as a range of unconventional policies have been rolled out across countries, driving asset price returns. This wave-riding has worked well in the past. Looking out over the secular horizon, however, diminishing returns to central bank interventions – and the potential for policy activism to do more harm than good, notably in the case of negative policy rates – advise against such an approach.
Of course he also differs in one area where Goodfriend is good, the use of the Fed’s balance sheet. Goodfriend has warned that the Fed’s buying of non-Treasury assets, like mortgage backed securities, gets it into the business of allocating capital. Instead, Clarida thought the Fed was too modest in buying up assets following the financial crisis.
As Matthew C. Klein of Barons notes:
Clarida thought the Fed could effectively respond to downturns by committing to buying as many bonds – including mortgage bonds and corporate bonds – as necessary to "cap" interest rates at the levels it wants:
Much of the existing literature either misses entirely or under-appreciates how robust an LSAP [large-scale asset purchase] program can be at lowering bond yields and/or credit spreads...a central bank can everywhere and always put a floor on any nominal asset price (or set of nominal asset prices) for as long as it wants...So long as the central bank is willing to buy an unlimited volume of those bonds (potentially including the entire outstanding stock) at the interest rate it wishes to put a ceiling on, it will succeed. And of course, the above reasoning also applies directly to an Lsap program targeted at corporate bonds or mortgage backed securities.
The Fed successfully capped U.S. government borrowing costs in the 1940s, and this experience was cited by the Fed's staff in mid-2003. While the idea failed to gain traction among American policymakers, the Bank of Japan has successfully used "yield curve control" to limit yields on Japanese government bonds since 2016. Clarida's position in 2010 suggests he would be keen on something similar, perhaps also including mortgage bonds and corporate bonds, should he be at the Fed during the next downturn.
In terms of Fed reform, Clarida is likely to be an ally for House Republicans who have pushed to make the Fed adopt a rules-based monetary policy framework. Clarida has long written about the advantages of a rules-based framework and even has his own “forward-looking” version of the Taylor Rule.
As a voting Fed member, Michelle Bowman will also have an impact on the future of monetary policy – but as far as I can tell she has made no public comment on the subject. Rather than being an economist, she’s an attorney who had a long career as Washington staffer. Her employers include Senator Bob Dole, House Transportation Committee, the House Oversight Committee, FEMA, and Homeland Security Secretary Tom Ridge. Not the best resume for draining the swamp.