Goodfriend Tells Lawmakers He Backs Fed's Dual Mandate on Jobs, Prices -- 2nd Update

By FeaturesDow Jones Newswires

Federal Reserve nominee Marvin Goodfriend told lawmakers Tuesday he supports the central bank's dual mandate to maintain stable prices and pursue maximum employment, after sharp questioning from Democrats over his past comments suggesting the Fed should focus on inflation.

Democrats pressed Mr. Goodfriend at his confirmation hearing to explain his warnings following the financial crisis that the Fed should move quickly to raise interest rates, including remarks in 2012 in which he said inflation could begin to rise dangerously if the Fed let the jobless rate fall below 7%. The unemployment rate in December was 4.1%, and inflation has continued to run below the Fed's 2% objective.

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"These wrong predictions are not outliers for you," said Sen. Elizabeth Warren (D., Mass.), after Mr. Goodfriend acknowledged he had been wrong about some of his inflation projections. "They have been part of your overall approach to monetary policy which effectively ignores the Fed's full employment mandate and instead focuses solely on speculative concerns about inflation."

Ms. Warren said she thought it would be a mistake to put Mr. Goodfriend on the Fed board.

President Donald Trump nominated Mr. Goodfriend, a Carnegie Mellon University professor and former Fed economist, in November to fill one of three vacancies on the board.

Mr. Goodfriend said his comments on the dual mandate were "academic," and said he has argued that price stability is essential for the Fed to pursue stimulative policies to help lower unemployment.

"I totally support it," he said of the central bank's dual mandate, adding that he regretted referring to the dual mandate as "incoherent."

Sen. Bob Menendez (D., N.J.) suggested Mr. Goodfriend had experienced a "confirmation conversion." He asked whether Mr. Goodfriend thought the Fed should have followed his advice to begin raising short-term interest rates in 2012.

"No, I don't," he said, but added that his remarks were being taken out of context.

"The history and the thinking about monetary policy has said if we want to get unemployment down to the natural rate...we as central banks need to stabilize long-run inflation expectations," he said. "That's all I'm saying."

Mr. Goodfriend also said he thought Fed policy was "more or less on the right path" and that inflation was slowly rising and could reach 2% in "a year or so."

Asked why he thought inflation was so low, Mr. Goodfriend said that is a puzzle around the world. He attributed it in part to global central bankers' commitment to keeping inflation expectations anchored, which he said had "cut off the inflation tail," as well as a long period of very low interest rates at several central banks.

Mr. Goodfriend, a widely respected monetary economist, would provide academic heft on a board that now has just two economists, including Chairwoman Janet Yellen. Ms. Yellen, whose four-year term as chairwoman ends Feb. 3, has said she would step down when her successor is sworn in.

The Senate is expected to vote this week on the nomination of Governor Jerome Powell to be the next Fed chairman.

On Tuesday, Mr. Goodfriend reiterated his objection to the Fed's buying of mortgage-backed securities as part of its postcrisis asset purchases aimed at lowering long-term interest rates. He has also said the Fed should limit its bond-buying to Treasury securities except in limited circumstances when it has been given explicit permission by Congress. He acknowledged Tuesday the Fed is moving back toward a policy of keeping only Treasury securities on its portfolio as it begins unwinding its massive balance sheet.

In a March 2017 appearance before the House Financial Services Committee, Mr. Goodfriend said the Fed should welcome more oversight from Congress to enhance its credibility. He also recommended that Fed officials compare their policy decisions against a mathematical rule such as the so-called Taylor rule.

On Tuesday, Mr. Goodfriend said a policy rule would help enhance Fed transparency, but he insisted he is committed to the central bank's independence.

"That's something that I completely believe in," he said.

Write to Kate Davidson at kate.davidson@wsj.com

(END) Dow Jones Newswires

January 23, 2018 13:53 ET (18:53 GMT)

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