Judy Shelton has been approved by the Senate Banking Committee and appears to be confirmed by the full Senate to fill one of two seats on the seven-member Federal Reserve Board of Governors.
The two previous elections for President Donald Trump, Herman Cain and Stephen Moore, failed in the Senate due to weak ratings and various indications of scandal. Christopher Waller, Trump’s other current pick, is considered more mainstream.
It’s unclear whether Shelton will succeed where Cain and Moore failed, but she presents the same problem that plagued Trump: He wants to keep interest rates low so that the economy will skyrocket and help him win reelection in 2020. He certainly could find a good … qualified person with a reputation for integrity who upholds this principled view of interest rates, but doesn’t seem to want well-qualified and principled people.
Instead, Trump seems to want loyalists to support whatever he says or wants right now. And Shelton, who spent the Barack Obama years criticizing the efforts of the Federal Reserve for economic stimulus, but now says he favors low interest rates to stimulate the economy, seems to have cut his clothes a lot.
Modern central banking is based on independence from the day-to-day political needs of elected officials. That tradition has continued throughout the Trump years, but arguably it is due more to Trump’s carelessness than anything else. And with Trump’s reelection prospects currently in doubt, Republican senators who had blocked fun businesses earlier in his term seem more open now.
The modern Federal Reserve is independent
The independence of the modern Fed is a consequence of the savage inflation of the 1970s fueled by the meddling of Richard Nixon.
Nixon appointed Arthur Burns to head the Fed during his first term, and then tried to control the Fed’s policy by poor quality and open means. Nixon’s basic goal was to keep the economy warm during his 1972 re-election campaign, even if it meant taking 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, conventional wisdom became that central bank independence it was key to avoid it.
There is a theory that a sitting president will always want to err in the direction of a little less unemployment now, even if that means a little more inflation. While that may be reasonable compensation on any given day, it inevitably means a lot of inflation in the long run. And as the theory goes, in the end this won’t even give you low sustainable unemployment, just the dreaded “stagflation” of the late 1970s.
During the 1980s and 1990s, this became a Fed independence standard that had become so strong that economic policy officials in the Obama administration would routinely refuse to comment on monetary policy, whether or not it was officially .
Still, at the end of the day, the Fed chairman and other board members are presidential appointments. Trump is not exactly a great rule-breaker or a great believer in independence. He wants a Fed to do what it wants.
Trump’s monetary policy has been all over the map
Trump, like other Republicans, spent the Obama years complaining that the federal deficit was too high, even when standard economic models argued that large deficits could help improve a major recession. Since taking office, Trump and congressional Republicans have worked tirelessly to increase deficits, even as the unemployment situation has improved.
A similar turn has occurred more quietly on the monetary policy front.
Conservative think tanks spent the Obama years grimly warning that the monetary stimulus was “downgrading the dollar.” Paul Ryan called on the country to completely abandon discretionary monetary policy and move to a “product-based currency” that serves as a kind of updated version of the gold standard. Trump himself argued that the solid performance of the stock market under Obama was a kind of unreal bubble induced by low interest rates.
Since Trump took office, mainstream conservatives have remained silent on this front. And Trump has made it clear, time and time again, that he wants and hopes that low interest rates will support his reelection offer. In early April 2019, he laid out a plan to gain control of the Federal Reserve by naming Cain and Moore for two vacancies on the board.
Cain was a simply unskilled choice with little relevant experience and a past riddled with scandals. She pulled out of the race a couple of weeks after the story of her possible nomination was broken, citing the idea that she could earn more money, and skip the “cumbersome” investigation process, 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 attack him.
So now we have Shelton, the American director of the European Bank for Reconstruction and Development who served as Ben Carson’s 2016 advisor before boarding the Trump train. Shelton is the author of the 2009 book Melting money, who 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 “solid money”.
In fact, inflation has been persistently low since 2009 in the US, Europe, Japan, and several smaller developed countries. However, during a 2016 interview, he criticized former Fed Presidents Ben Bernanke and Janet Yellen for keeping interest rates too low for too long and said: “It would have returned to normal interest rates a lot faster. “
However, for 2019, Shelton mysteriously told the New York Times that he believes interest rates are too high and that he would support lowering them to near-zero levels which he denounced as too stimulating when the unemployment rate was much higher than last year. .
Perhaps most tellingly, when she was interviewed by the Financial Times for a May 2019 article about her views on monetary policy, she decided to do the interview at the Trump International Hotel in Washington, DC She also suggested that Mar-a-Lago , Trump’s private complex in Florida, could be an ideal place to organize your proposal for an international conference on the gold standard. She was saying, in other words, that she is a Trump loyalist above all else. And while on one level it should be more confirmable than Moore or Cain, since it received confirmation from the Senate for its current low-profile work, it poses the same risks of politicization and loss of independence as they do. But Republican senators seem increasingly indifferent.
A time bomb for Biden?
One possible reason for the change: Trump currently seems more likely to lose re-election in November.
The Fed board, unlike regular cabinet or sub-cabinet appointments, does not turn around with the arrival of a new administration. Shelton would be just one of 12-person committees that set interest rates. But Trump has already appointed several governors to the Fed board, and Shelton could be a thorn in the Biden administration. Conversely, if the seat is allowed to remain vacant, it will be filled by a person designated by Biden. Given the circumstances, that may be reason enough to give you the go-ahead.
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