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 the Senate Banking Committee.
Fischer, 70, 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," he said.
His comments came in response to a query from Democratic Senator Elizabeth Warren of Massachusetts, who suggested that the Obama 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 the top administration officials with Citigroup ties, she noted. Citigroup, the third-largest U.S. bank, was one of several firms bailed out by the U.S. government during the financial crisis.
Fischer, who taught economics at the Massachusetts Institute of Technology for years, is considered a leading light on monetary policy. Before heading to Citigroup, where he was vice chairman, he served as second-in-command at the International Monetary Fund and as chief economist at the World Bank.
His role at Citigroup had been expected to draw some criticism, but Warren was the only lawmaker to press the issue.
In fact, Senator Charles Schumer, a New York Democrat, rallied to Fischer's defense.
"All too often we have regulators who don't understand how the private sector acts, and the private sector runs rings around them," Schumer said. "Three years at Citibank I think should be an asset rather than a liability."
APPROPRIATE POLICY MIX
The hearing did not offer much insight into Fischer's thinking on monetary policy, but he suggested his views were largely in line with those of Fed Chair Janet Yellen.
"I think the mixture that we are seeing coming out of (the) Fed now is approximately appropriate," he told the panel.
Fischer said the high level of U.S. unemployment and low level of inflation underscored the need for an easy monetary policy.
But he also said the Fed might face a more difficult policy calculus as the economic recovery progresses.
The U.S. central bank 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 plans to trim its monthly securities purchases with the aim of winding them down later this year as long as the economy continues to improve.
"I think the exit is beginning, or has begun," Fischer said.
The panel used the hearing to vet two other Fed nominees: Lael Brainard, who had served until recently as a top financial diplomat at the U.S. Treasury, and current Fed Governor Jerome Powell, who Obama has nominated for a fresh term.
Of the three, Brainard expressed the most concern about the state of the job market, where unemployment years after the end of the 2007-2009 recession is a still high 6.7 percent.
"It is obvious that our job market is much weaker than it should be at this point in the recovery," she said.
The senators devoted a chunk of the hour-and-a-half-long hearing to banking regulation, but broke little new ground.
To reduce the likelihood that giant banks could fail and take down the financial system, Powell said U.S. regulators were considering capital surcharges for large banks based on their sources of funding.
Brainard for her part said she would be open-minded on the question of higher capital surcharges, which she said she would need to give careful study. Fischer said he fundamentally agreed with both of his "potential future colleagues" on the question.
But apart from Warren, the Fed nominees faced few pointed 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.
(Reporting by Jason Lange and Krista Hughes; Writing by Ann Saphir; Editing by Paul Simao and Chizu Nomiyama)