May 15, 2018 5:04PM

Could Next Vice Chair Bring A New Rule to the Fed?

Richard Clarida had his nomination hearing to become Vice Chair of the Board of Governors of the Federal Reserve System before the Senate today. He delivered a nearly mistake‐​free performance, giving articulate and concise answers to Banking Committee members’ questions. His responses showed an understanding of both the Fed’s current normalization plans and some political concerns.

Clarida is widely agreed to be an expert on the international monetary system, with his nomination receiving a bipartisan letter of support, a rare occurrence in today’s Washington. However, most of the questions he fielded were on the regulatory aspects of the Fed. Here, Clarida mostly underscored Chair Powell’s interest in employing cost‐​benefit analysis to appropriately tailor regulations throughout the financial system, without sacrificing safety and soundness. 

Clarida’s missed opportunity came when Senator Elizabeth Warren asked whether any Fed “rule” could be made stronger. Candidly, his answer was mostly boilerplate. Instead of standard talking points, Clarida could have highlighted the evolution of his own thinking on monetary rules and targets since the crisis that has led him to embrace a price level targeting regime. While such a target is better than the Fed’s current inflation target, there are reasons to believe Clarida may become an advocate of superior option: nominal GDP level targeting. Adopting the proper target would improve monetary policy, in terms of both credibility and effectiveness, and address many of the concerns voiced by Senators today—from seeing escalating home foreclosures during downturns to having the Fed employ multiple rounds of QE to combat those slowdowns.