Exclusive: Pimco economist Clarida seen as front-runner for Fed deputy job

[March 02, 2018]   By Jonathan Spicer and Jennifer Ablan

NEW YORK (Reuters) - Richard Clarida, an economist at fund manager Pimco, has emerged as a front-runner to become the Federal Reserve's next vice chair, according to two people familiar with the effort to fill the depleted upper ranks of the U.S. central bank.

The White House has interviewed Clarida, seen by Republicans as a safe pair of hands, and at least three other prospects for the job in the last couple of months. Clarida, 60, has been mentioned among leading candidates in recent weeks, but this is the clearest indication he has emerged as a top contender after the job interviews.

"He is the front-runner," one of the two people said of Clarida, who besides working for the bond-giant Pimco also teaches at the Columbia University's economics department and worked as an assistant U.S. Treasury secretary under George W. Bush.

President Donald Trump's administration has yet to decide who it will ultimately pick to help steer the U.S. economy through a potential growth burst, and an unprecedented leadership transition toward a more Republican-leaning Fed under new Chairman Jerome Powell.

The vice chair job, vacant since Stanley Fischer stepped down in October, is considered one of the most influential Fed positions alongside the chair and the head of the New York Fed.

There is also a "short list" for that job after current New York Fed President William Dudley announced plans to retire by mid-year, people familiar with that search told Reuters. It will be New York Fed directors, not the White House, who will chose his successor.

Reuters spoke to candidates and those close to them, people in contact with White House officials searching for Fischer's successor, and with people in contact with New York Fed directors. Most spoke under condition of anonymity due to the sensitivity of the interviews.

Janet Yellen handed the reins to Powell in early February. That left four of seven governor jobs vacant and marked a historic overhaul of Fed leadership that has raised uncertainty over U.S. interest rate policy in response to tax cuts, more government spending and hints of inflation.

For now Powell says the Fed will continue gradually raising rates despite the risk of an "overheating" economy. But that approach could shift depending on the views of the new Fed vice chair and new president in New York, who serves as vice chair of the policy-making committee.

"You have that triumvirate and those three really shape policy," said a former U.S. central banker who has been in touch with some of the candidates for both deputy jobs.

NO RADICAL VIEWS

Clarida, managing director and monetary policy analyst at Pacific Investment Management Co., would likely align ideologically with the centrist Powell. He has argued that the Fed will probably not be able to raise rates as much as in past cycles, but also warned in December that investors may be "a little too relaxed" about the threat of higher inflation.

When Trump nominated Powell in November, Clarida welcomed the choice.

"We believe Jerome Powell is a smart choice for Fed chair." Clarida wrote in his regular Pimco blog. "He is likely to provide continuity in the monetary policy framework developed by the Yellen Fed for a gradual normalization of the policy rate and a predictable reduction in the Fed's balance sheet."

Clarida also said Powell would probably back "prudent" adjustments in financial regulation.

Some media reported that Barack Obama considered naming Clarida as a Fed governor in 2011 before eventually going with Powell.

The two people familiar with the search told Reuters Clarida had the best shot at getting the nod from Trump, a Republican. One of them said Clarida has benefited from the endorsement of John Taylor, a Stanford University professor and favorite of conservatives in Congress who himself was in the running last year for the Fed chair. Taylor declined to comment.

Richard Clarida, managing director at PIMCO. PIMCO/via REUTERS

"He doesn't have any particularly radical views that would translate to any departure from what policy has been," said Jeffrey Frankel, a professor at Harvard Kennedy School who worked with Clarida at the National Bureau of Economic Research.

The White House has also interviewed Cleveland Fed President Loretta Mester, a pragmatic hawk on policy with more than three decades of Fed experience; Mohamed El-Erian, chief economic adviser at Allianz SE <ALVG.DE> and a former International Monetary Fund deputy director; and John Williams, who was Yellen's deputy at the San Francisco Fed before succeeding her in 2011. Reuters and other media previously reported all were under consideration.

The White House declined to comment on Clarida, as did the four candidates via spokespeople for their firms or Fed banks.

HORSE RACES

In New York, where formal job interviews began in January, people familiar with the search said the short list included former NYU Stern dean Peter Blair Henry, former New York Fed markets chief Brian Sack who is now at D.E. Shaw, and JPMorgan Chase's chief regulatory affairs officer Sandie O'Connor. Current New York Fed markets chief Simon Potter, former Treasury deputy secretary Mary Miller, and UBS economist Seth Carpenter, also formerly of Treasury, were also in the mix, those people said.

The New York Fed's president has a permanent vote on policy and serves as the central bank's eyes and ears on Wall Street. Two people said Dudley privately favored Henry, though another person close to Dudley said he has not formally endorsed anyone. It was not clear whether there were front-runners now and when a decision would be made.

The New York Fed declined to comment. Those on the short list either declined to comment or did not respond to requests.

The Trump administration appeared closer than the New York Fed to a decision in part because of the Fed Board vacancies, according to those familiar with both search efforts.

Powell was playing a larger role than his predecessors in making his views known to the White House and to the New York Fed, four people told Reuters, with two noting he has stressed monetary policy expertise and has discussed specific names.

Two sources said he had supported Williams for vice chair, but they noted his candidacy may be in doubt after the White House considered others, including Mester, for the job following his interview in January.

One person said Gary Cohn, Trump's chief economic advisor, backed El-Erian.

Powell has no formal role in selecting Fed governors, though the White House typically seeks the chair's advice. He and the Fed Board must approve the nominee for New York Fed president.

Clarida would shore up the ranks of professional economists at the Fed where eight of 15 current policymakers have PhDs.

However, his nomination could stoke criticism over lack of diversity at the central bank. Trump's other picks - Powell, Vice President for Supervision Randal Quarles, and governor nominee Marvin Goodfriend, who faces a narrow Senate confirmation vote - are also white, male and Republican.

(Reporting by Jonathan Spicer and Jennifer Ablan; Editing by David Chance and Tomasz Janowski)

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