June 2, 2017 / 9:52 PM / 3 months ago

UPDATE 2-Trump makes two conservative picks for Fed: NY Times

(Recasts lede, adds markets)

June 2 (Reuters) - U.S. President Donald Trump's picks for two open spots on the Federal Reserve's Board of Governors may push for tighter monetary policy if they receive the Senate confirmation needed to join the Fed's rate-setting panel, their records suggest.

Trump will nominate Carnegie Mellon University professor Marvin Goodfriend and former Treasury Department staffer Randal Quarles to fill two of the three open seats on the Federal Reserve's Board of Governors, the New York Times said on Friday, citing unnamed people with direct knowledge of the decision.

The conservative picks come as Fed Chair Janet Yellen continues to slowly raise interest rates and lay out plans to shed some of the trillions of dollars of bonds bought in the wake of the financial crisis.

Goodfriend in particular has been skeptical of the Fed's bond-buying programs, saying that it is too close to fiscal policy.

Goodfriend and Quarles did not immediately respond on Friday to requests for comment. A White House spokeswoman said officials were not ready to make an announcement yet.

Goodfriend, 66, a former Richmond Fed policy advisor, also has urged the central bank to adopt simpler rules governing policy decisions.

That view has support among many congressional Republicans, though Yellen has strongly opposed their proposed legislation on grounds that it would tie the Fed to make mechanical decisions that would harm the economy. The rule at the center of that legislation suggests the Fed should be raising rates more aggressively than the three annual rate hikes policymakers currently expect for both 2017 and 2018.

That could make for an interesting dynamic with bond investors increasingly skeptical of faster rate hikes amid uncertainty over the outlook for tax cuts under Trump's young administration.

After Friday's report that employers added fewer than expected jobs in May, short-term interest-rate futures traders were still pricing in a June rate hike, but Treasury yields fell as investors reduced bets on subsequent hikes.

One area Goodfriend may agree with Yellen is on the Fed's plan to start shrinking its $4.5-trillion balance sheet before the end of the year. Though the Fed has not published its plan in detail, policymakers have said the portfolio would shrink as if on "autopilot."

In an interview with Reuters last November, Goodfriend appeared to also support such a preset plan.

"The Fed should choose a rule for shrinking the balance sheet so that, as it sold off its assets, it was pre-committed and markets could anticipate sales and prepare for them," he said. Despite differences of opinion with Yellen, he said then, "If there is interest in my point of view and my 30-something years of thinking, writing, and teaching about the Fed and central banking, then I would have to consider serving."

A lawyer by profession, Quarles, 59, worked on financial regulation at the U.S. Treasury for years, including during the 2007-2009 financial crisis. Reuters had earlier reported he was a leading candidate to be Trump's pick for the Fed's vice chair in charge of banking supervision.

"Many market participants have been barking up the wrong tree, arguing that Trump is an easy money guy because he borrowed a lot when he was a real-estate tycoon," said Stephen Stanley, Amherst Pierpont's chief economist, who worked for Goodfriend when he was at the Richmond Fed. "If these two nominees are eventually confirmed, the tone of the Fed Board will instantly swing to a far more hawkish tenor." (Reporting by Ann Saphir and Jonathan Spicer; additional reporting by Steve Holland and Richard Leong; Editing by Chizu Nomiyama and Diane Craft)

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