Richard Clarida, managing director of Pacific Investment Management Co. (PIMCO), speaks during a Bloomberg Television interview in New York, U.S. (Photographer: Christopher Goodney/Bloomberg)

Clarida Picked as Fed's No. 2 as Powell Inner-Circle Takes Shape

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(Bloomberg) -- U.S. President Donald Trump announced his intention to nominate Richard Clarida, a respected monetary economist and Pacific Investment Management Co. global strategic adviser, as vice chairman of the Federal Reserve.

In a White House statement released Monday, Trump also announced plans to nominate Kansas State Bank Commissioner Michelle Bowman as Fed governor representing the interests of community banks. Both selections are subject to confirmation by the U.S. Senate. The seven-seat Fed Board currently has four vacancies.

If confirmed, the 60-year-old Clarida would bring a mix of skills to the central bank’s No. 2 position. These include knowledge of financial markets gained during more than a decade at asset manager Pimco, to insights into how Washington works from his time at the Treasury Department under President George W. Bush.

His nomination also fills out the leadership team of new Fed Chairman Jerome Powell following the selection earlier this month of John Williams as the next head of the bank’s powerful New York branch. Powell, who doesn’t have a Ph.D. in economics, will now have two top-flight economists as his wingmen. A long-time professor at Columbia University, Clarida would replace Stanley Fischer, who stepped down as vice chairman in October.

Pragmatic Centrist

“I would describe him as centrist and pragmatic,” said New York University professor Mark Gertler, who has co-written a number of research papers with Clarida. “He has a nice balance between understanding and contributing to what the academic literature has to say and very practical, real world knowledge.”

With the announcement, which was first reported by the Wall Street Journal, Trump extended his overhaul of the Fed’s Board of Governors. In addition to Powell and Vice Chairman for Supervision Randal Quarles, Trump has also picked economist Marvin Goodfriend to be a governor. Goodfriend was cleared by the Senate Banking Committee on Feb. 8 but his nomination has yet to have a vote before the full Senate.

Clarida will join the Fed as it pursues a gradual series of interest-rate hikes and a reduction in its bond holdings under the auspices of Powell, who took the helm of the U.S. central bank in February. Powell said in a speech earlier this month that the outlook for inflation and employment support further gradual rate increases.

The vice chairman plays a critical support role for the central bank’s leader, and often heads special projects at the request of the chair. Along with the president of the New York Fed, who acts as the central bank’s eyes and ears on Wall Street, the deputy typically forms a key voting bloc with the chairman on both policy and strategy.

‘Just What Jay Needs’

Clarida “is just what Jay needs,” said Timothy Adams, president of the Washington-based Institute of International Finance, referring to Powell by his nickname. “He’s well respected in the financial industry, well respected in academia and has got a team mentality.”

Since 2014, Clarida has led Pimco’s annual secular forum that brings in former policy makers and other high-powered outsiders to help the Newport Beach, California-based firm decide how to manage its $1.75 trillion in assets.

He was an early progenitor of the so-called “new neutral” concept championed by Pimco that argues that equilibrium global interest rates -- ones that neither spur nor stifle economic growth -- are significantly lower than they were in the past.

New Neutral

In a Dec. 13 Bloomberg Television interview, he reckoned that rate in the U.S. is now closer to 2 percent than to 3 percent. Fed policy makers, in contrast, peg the neutral rate at 2.9 percent, according to the median projection of officials in March. Williams, who is currently president of the San Francisco Fed, has suggested it could be 2.5 percent.

In the Bloomberg interview, Clarida saw a chance that the Fed could raise interest rates four times this year and that inflation could eventually overshoot the central bank’s 2 percent target, though he said that was not his base case.

“We could get four hikes if the growth in the economy is stronger because of the tax cuts,” he said. “But importantly, also, you’d actually need some indication that inflation is moving up too quickly for the Fed’s taste.”

Clarida was in the Treasury Department on Sept. 11, 2001, the day that al-Qaeda terrorists struck the World Trade Center in New York and the Pentagon just outside Washington. “We were evacuated out of Treasury,” he told Bloomberg radio in an interview broadcast on Aug. 5. “It was actually quite scary.”

Crisis Response

Besides dealing with the financial aftershocks of the attacks, Clarida also helped formulate the Bush administration’s response to the Enron Corp. and WorldCom Inc. accounting scandals. He left his post as assistant Treasury secretary for economic policy in May 2003.

A graduate of Harvard University in 1983 with a Ph.D. in economics, Clarida has concentrated his academic research on monetary policy, currency exchange rates and international capital flows.

He’s perhaps best known for his work on “dynamic stochastic general equilibrium” computer models that try to predict how the economy will react to shocks and changes in policy and which are widely used by the Fed and other central banks.

Clarida has also done extensive research into monetary policy rules, such as those developed by Stanford University professor John Taylor, and their application worldwide.

In a June 2017 paper, he wrote that “best practice monetary policy has been implemented with reference - if not with mechanical adherence - to interest rate feedback rules.”

Clarida, who’s taught at Columbia since 1988 and once served as chairman of its economic department, also has expertise in currencies. In the late 1990’s, he helped Credit Suisse Group AG build an econometric model of the market . He also authored a 60-page paper on exchange rates after the Asian financial crisis.

A self-described “avid, amateur musician,” Clarida plays acoustic guitar and bass and has a a studio in his Connecticut home.

©2018 Bloomberg L.P.

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