Judy Shelton has been approved by the Senate Banking Committee and seems likely to be confirmed by the full Senate to fill one of two vacancies on the seven-member Federal Reserve Board of Governors.
President Donald Trump’s two previous picks, Herman Cain and Stephen Moore, failed in the Senate due to weak qualifications and various hints of scandal. Christopher Waller, Trump’s other current pick, is considered more conventional.
Whether Shelton will succeed where Cain and Moore failed is unclear, but she does present the same problem that’s bedeviled Trump: He wants to keep interest rates low so that the economy soars and helps him win reelection in 2020. He certainly could find a well-qualified person with a reputation for integrity who holds this principled view on interest rates, but he doesn’t seem to want well-qualified, principled people.
Instead, Trump seems to want loyalists who will support whatever it is he happens to say or want at the moment. And Shelton — who spent the Barack Obama years railing against the Federal Reserve’s efforts at economic stimulus but now says she favors low interest rates to stimulate the economy — very much seems to be cut from that cloth.
Modern central banking is built on a foundation of independence from the day-to-day political needs of elected officials. That tradition has held up in the Trump years, but arguably more due to Trump’s sloppiness than to anything else. And with Trump’s reelection prospects currently in doubt, Republican senators who’d blocked funny business earlier in his term seem more open to it now.
The modern Federal Reserve is independent
The modern Fed’s independence is an outgrowth of the wild inflation of the 1970s spurred by Richard Nixon’s meddling.
Nixon appointed Arthur Burns to run the Fed during his first term and then sought to control Fed policy through both overt and sleazy means. Nixon’s basic goal was to keep the economy hot through his 1972 reelection campaign, even if that meant running some risk of inflation. Inflation, of course, became a major problem in the mid-1970s. As inflation came back under control in the early 1980s, the conventional wisdom became that central bank independence was key to avoiding it.
There’s a theory that an incumbent president will always want to err in the direction of a little less unemployment now, even if it means a little more inflation. Although that may be a reasonable trade-off on any given day, over the long run it inevitably means a lot of inflation. And as the theory goes, in the end this won’t even get you sustainable low unemployment — just the dreaded “stagflation” of the late 1970s.
During the 1980s and ’90s, this evolved into a norm of Fed independence that had grown so strong, economic policy officials in the Obama administration would routinely decline to comment at all on monetary policy, either on or off the record.
Still, at the end of the day, the Fed chair and other members of the board are presidential appointees. Trump isn’t exactly a huge respecter of norms or a big believer in independence. He wants a Fed that will do what he wants.
Trump’s monetary policy takes have been all over the map
Trump, like other Republicans, spent the Obama years complaining that the federal deficit was too high even as standard economic models argued that large deficits could help ameliorate a major recession. Since taking office, Trump and congressional Republicans have worked relentlessly to push deficits higher even as the unemployment situation has improved.
A similar turnabout has happened more quietly on the monetary policy front.
Conservative think tanks spent the Obama years warning darkly that monetary stimulus was “debasing the dollar.” Paul Ryan called on the country to altogether abandon discretionary monetary policy and move to a “commodity-based currency” that would serve as a kind of updated version of the gold standard. Trump himself argued that the strong stock market performance under Obama was a kind of unreal bubble induced by low interest rates.
Since Trump took office, mainstream conservatives have been quiet on this front. And Trump has made it clear — over and over again — that he wants and expects low interest rates to support his reelection bid. In early April 2019, he laid out a plan to gain control of the Fed by appointing Cain and Moore to two board vacancies.
Cain was a plainly unqualified pick with little relevant experience and a scandal-plagued past. He took himself out of the running a couple of weeks after the story of his potential nomination broke, citing the idea that he could earn more money — and skip the “cumbersome” vetting process — by avoiding government service. That left Moore, whose nomination collapsed after the revelation of a long series of misogynistic writings offered a plausible pretext for Senate Republicans to spike him.
So now we get Shelton, the American director of the European Bank for Reconstruction and Development who served as an adviser to Ben Carson’s 2016 before hopping on the Trump train. Shelton is the author of the 2009 book Money Meltdown, which warned that the global monetary system was dangerously inflationary and urged the world to convene a new international conference to return to the gold standard and restore “sound money.”
In reality, inflation has been persistently low since 2009 in the US, Europe, Japan, and several smaller developed countries. During a 2016 interview, however, she criticized former Fed chairs Ben Bernanke and Janet Yellen for keeping interest rates too low for too long, saying, “I would have gotten back to normalization of interest rates much more quickly.”
Yet by 2019, Shelton was mysteriously telling the New York Times that she thinks interest rates are too high and would support cutting them back to the near-zero levels that she denounced as too stimulative when the unemployment rate was much higher than it was last year.
Perhaps most tellingly, when the Financial Times interviewed her for a May 2019 article about her monetary policy views, she chose to do the interview at the Trump International Hotel in Washington, DC. She also suggested that Mar-a-Lago, Trump’s private resort in Florida, might be an ideal place to host her proposed international conference on the gold standard. She was saying, in other words, that she’s a Trump loyalist beyond all else. And while on one level she should be more confirmable than Moore or Cain, having already received Senate confirmation for her current lower-profile job, she poses all the same risks of politicization and lost independence as they did. But Republican senators seem increasingly unbothered.
A time bomb for Biden?
One possible reason for the shift: It currently seems more likely than not that Trump will lose reelection in November.
The Fed board, unlike regular Cabinet or sub-Cabinet appointments, does not turn over with the arrival of a new administration. Shelton would be just one of 12-person committee setting interest rates. But Trump has already appointed several governors to the Fed board, and Shelton could be a thorn in the Biden administration. And conversely, if the seat is allowed to remain vacant, it would be filled by a Biden appointee. Under the circumstances, that may be reason enough to give her the thumbs-up.