By Jason Lange and Krista Hughes
WASHINGTON (Reuters) - Stanley Fischer, President Barack Obama's nominee to be No. 2 at the U.S. Federal Reserve, on Thursday defended his ties to Citigroup, saying he would have been ill-prepared for his last central banking job without his experience at the megabank.
"My three years at Citigroup were the most important element in my education that enabled me to be an effective supervisor of banks, which was one of my duties as Governor of the Bank of Israel," Fischer told members of the Senate banking committee.
Fischer left Citigroup in 2005 to become Israel's top central banker, a post he held until the middle of last year.
"Without that experience I would have come to it largely with an academic background, without ever having seen the inside of a bank," said Fischer.
His comments came in response to a query from Senator Elizabeth Warren, who suggested that the administration's penchant for tapping former Citigroup executives to fill top economic posts potentially put the government "under the grip of a tight-knit group" and made it vulnerable to "groupthink."
Treasury Secretary Jack Lew and U.S. Trade Representative Michael Froman are among top administration officials with Citigroup ties, she noted. Citigroup was one of several firms bailed out by the U.S. government during the financial crisis.
Fischer's role at Citigroup had been expected to draw some criticism from lawmakers keen to hire a top U.S. banking regulator who will be tough on financial institutions. Warren was the only lawmaker to press the issue, however, and Fischer parried her criticism over the lack of "diversity" in the backgrounds of top administration officials by pointing out that he there are plenty of non-Citibank officials whom he also knows and respects.
APPROPRIATE POLICY MIX
Overall the hearing suggested there is little to differentiate Fischer's thinking on monetary policy from the Fed's new chair, Janet Yellen.
"I think the mixture that we are seeing coming out of (the) Fed now is approximately appropriate," he told the panel.
Right now, he said, unemployment is too high, and inflation is below the Fed's 2-percent target, underscoring the need for continued policy easing.
The Fed has kept interest rates near zero for more than five years, and bought trillions of dollars in Treasuries and housing-backed securities to push down long-term borrowing costs and rev up the economy.
In December it announced that it was beginning to trim these monthly purchases of securities, and Fed officials have said they expect to wind the program down later this year as long as the economy continues to improve.
"I think the exit is beginning, or has begun," Fischer said. But while eventually rising interest rates may eventually force the central bank to make uncomfortable policy trade-offs between fighting unemployment and inflation, he said, "we're not there yet."
Fischer also suggested he takes comfort in financial markets' response to current Fed policy.
When then-Fed Chairman Ben Bernanke first hinted last May that the bond-buying program would be drawn to a close, markets swooned.
"When the actual tapering began, it had a much more stable impact," Fischer said. "And that seems to be continuing."
Two other Fed nominees, Lael Brainard and current Board Governor Jerome Powell, were also being vetted by the Senate panel on Thursday.
Of the three, Brainard expressed the most concern about the state of the job market, where unemployment years after the end of the Great Recession is still at a relatively high 6.7 percent.
"It is obvious that our job market is much weaker than it should be at this point in the recovery," Brainard told the lawmakers.
Apart from Warren, the Fed nominees faced few pointed questions from the 22-member panel, only eight of whom actually asked questions. Both the panel and the full Senate are expected to ratify the nominees' candidacies, although it is unclear when they will hold a vote.
Speaking after Fischer's exchange with Warren, Senator Charles Schumer said he personally believed Fischer's banking experience would be an asset at the Fed, along with his bona fides, Schumer joked, as a fellow New Yorker.
"I am very proud to be a New Yorker," responded Fischer, who holds both U.S. and Israeli citizenship and who grew up in southern Africa, "but I have to work on my accent, I understand."
Schumer broke in.
"You sound to me like you're from Brooklyn."
(Reporting by Jason Lange and Krista Hughes; Writing by Ann Saphir; Editing by Paul Simao and Chizu Nomiyama)
