Fed Board Nominees Back Exit Strategy Ensuring Price Stability

Photographer: Andrew Harrer/Bloomberg

Jerome Powell, nominee to be a member of the board of governors with the U.S. Federal Reserve, left, during a Senate Banking Committee hearing with fellow nominee Jeremy Stein in Washington on March 20, 2012. Close

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Photographer: Andrew Harrer/Bloomberg

Jerome Powell, nominee to be a member of the board of governors with the U.S. Federal Reserve, left, during a Senate Banking Committee hearing with fellow nominee Jeremy Stein in Washington on March 20, 2012.

President Barack Obama’s nominees to the Federal Reserve Board told a Senate panel they would help the Fed withdraw stimulus when necessary in a way that keeps prices stable and doesn’t jar financial markets.

Jerome Powell, a former private equity manager and Treasury undersecretary under President George H.W. Bush, told the Senate Banking Committee today he sees “tremendous risk in the exit,” including inflation and asset price bubbles. Jeremy Stein, a Harvard University economist and former adviser to Treasury Secretary Timothy F. Geithner, told the panel the central bank must avoid a “disruptive impact on markets.”

Powell and Stein, both with financial market expertise, said they would pursue in a balanced way the Fed’s dual mandate to ensure full employment and price stability. They were nominated by Obama in January to fill vacant Fed board seats. If confirmed, they would fill a void left by Kevin Warsh, a former Morgan Stanley banker and confidante of Chairman Ben S. Bernanke during the financial crisis, said Antulio Bomfim, a former Fed economist. Warsh resigned from the board in April.

“I don’t think there’s been anybody with either strong experience or academic credentials in financial markets” since Warsh left, said Bomfim, now a senior managing director with Macroeconomic Advisers LLC in Washington. “Together they bring both.”

“There’s tremendous risk in the exit, and that’s well understood,” Jerome Powell said in response to questioning on the balance sheet. “You don’t want to do it too early and snuff out a recovery that’s too weak.” Photo: Andrew Harrer/Bloomberg Close

“There’s tremendous risk in the exit, and that’s well understood,” Jerome Powell said... Read More

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“There’s tremendous risk in the exit, and that’s well understood,” Jerome Powell said in response to questioning on the balance sheet. “You don’t want to do it too early and snuff out a recovery that’s too weak.” Photo: Andrew Harrer/Bloomberg

Powell and Stein need to overcome partisan wrangling in the Senate, which has delayed action on nominations for financial regulatory posts and earlier rejected a Nobel laureate economist, Peter Diamond, for a seat on the Fed.

Regulatory Overhaul

During testimony the nominees described how they would implement the Dodd-Frank regulatory overhaul and help the Fed unwind its $2.9 trillion balance sheet. They said the central bank needs to eventually communicate how it will raise interest rates from the near zero level that the Fed said it expects through at least late 2014.

Scaling back the balance sheet “will be one of the most important tasks,” Stein said in response to a lawmakers’ comments. The central bank’s mandates on prices and employment are “on an equal footing,” he said.

“There’s tremendous risk in the exit, and that’s well understood,” Powell said in response to questioning on the balance sheet. “You don’t want to do it too early and snuff out a recovery that’s still weak and you don’t want to do it too late and cause inflation,” he said.

When tightening monetary policy, the central bank must be careful not to have a “disruptive impact on markets,” Jeremy Stein said. Unwinding the balance sheet “will be one of the most important tasks,” he said. Photo: Andrew Harrer/Bloomberg Close

When tightening monetary policy, the central bank must be careful not to have a... Read More

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When tightening monetary policy, the central bank must be careful not to have a “disruptive impact on markets,” Jeremy Stein said. Unwinding the balance sheet “will be one of the most important tasks,” he said. Photo: Andrew Harrer/Bloomberg

Powell, 59, said he can’t specify the timing of the withdrawal of stimulus.

“It’s not a date you can pick here today, it’s going to depend on the future path of the economy,” he said. “It has to be weighed under the dual mandate in which both aspects are equal.”

Recess Appointment

Nominees for positions at the Fed, the Federal Deposit Insurance Corp. and the Comptroller of the Currency have been in limbo since Obama in January used a recess appointment to install Richard Cordray as the first director of the Consumer Financial Protection Bureau without formal Senate approval.

The president made the appointment of Cordray after Republicans blocked his confirmation in December. While the Democrats control 53 votes in the 100-member chamber, Senate leaders needed at least 60 senators to advance the nomination.

“There’s still certainly some bitterness about Cordray” among Republicans, said Mark Calabria, an economist and the director of financial regulation studies at the Cato Institute and a former senior aide for Republicans on the Senate Banking Committee.

“It’s not clear whether Republicans will oppose them,” Calabria said of the Fed nominees. “At minimum there will be a party-line vote that gets them out of the committee,” he said.

Committee Approval

Gaining committee approval wouldn’t ensure that Powell and Stein later win appointment in a vote by the full Senate. Don Stewart, a spokesman for Senate Minority Leader Mitch McConnell of Kentucky, said the Republican leader hasn’t indicated yet whether he backs either of the Fed nominees.

The committee is also considering the nominations of Jeremiah Norton to the board of directors of the Federal Deposit Insurance Corp.; Richard Berner as director of the Treasury Department’s Office of Financial Research; and Christy Romero as special inspector general for the Troubled Asset Relief Program.

The Standard & Poor’s 500 Index fell 0.3 percent to 1,405.52 at 4:30 p.m. in New York. The yield on the 10-year Treasury note dropped two basis points to 2.36 percent.

The Fed’s board currently consists of Bernanke and Vice Chairman Janet Yellen, both economists; Daniel Tarullo, a former professor at the Georgetown University Law Center; Sarah Bloom Raskin, a former top bank regulator for Maryland; and Elizabeth Duke, who had been a community banker.

‘Private Economy’

“I’d like to see some folks on the board who have some more understanding of the private economy,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut.

Both Fed nominees underscored their experience with capital markets, with Powell highlighting his work as an investor and investment banker and Stein discussing his research on the 1987 stock-market crash and the impact of monetary policy on the banking system, according the text of their remarks.

Stein, 51, said that studying the crisis made him “humble and honest about the limitations of our understanding” as economists.

“Too often in economics, theories have been used in a rigid fashion, making us less, not more, open to learning from what happens in the real world,” he said. “This is when things have gone badly off the rails for economists, and for those who rely on us for policy advice.”

Obama Adviser

Stein served in the Obama administration from February to July 2009 as a senior adviser to the Treasury secretary and on the staff of the National Economic Council, according to Harvard’s website. He was also a senior staff economist on the Council of Economic Advisers from September 1989 to June 1990, leaving just before Powell was nominated to a Treasury post.

Stein rejoined Harvard as an economics professor in 2000 and has served on the New York Fed’s Financial Advisory Roundtable since 2006. He has focused his research on topics including debt markets, corporate investment and stock market efficiency.

Powell is a visiting scholar at the Bipartisan Policy Center in Washington. He was a partner at the private equity firm the Carlyle Group LP from 1997 through 2005, where he led the industrial group within the U.S. buyout fund, according to a biography from the Bipartisan Policy Center.

To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net; Jeff Kearns in Washington at jkearns3@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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