When someone seeking confirmation to high office has a paper trail fraught with positions antithetical to their confirmation, their theme song quickly becomes Shaggy’s It Wasn’t Me, as they flip and flop to disavow their earlier convictions.
The most recent purveyor of this strategy is Judy Shelton, one of President Trump’s most recent likely nominees for the Federal Reserve. Ms. Shelton, who worked on Trump’s campaign and transition team, currently holds a Senate-confirmed position as the U.S. representative to the European Bank for Reconstruction and Development.
After reviewing her writings and comparing them with what she’s saying in her current campaign to get the Fed job, I’m convinced that her appointment would be extremely problematic for at least two reasons. One, she would try to undermine the flexibility that’s so important to today’s monetary policy, and two, she’d give the president a voice inside of the Fed, compromising the essential independence of the central bank.
This judgement stems in part from the extent to which Ms. Shelton is trying to remake herself into an easy-money dove in the president’s image, or at least his image since he’s taken office. Before that, both Trump and Shelton lambasted the Fed for helping Obama by holding interest rates down (in fact, the Fed was fighting the recession and initially weak recovery). Now, of course, he wants them to cut rates to help him.
And contrary to everything she’s stood for in the past, Ms. Shelton agrees with him.
To understand the real Ms. Shelton, as opposed to her current incarnation, you need to understand why Larry Kudlow, one of Trump’s top economic advisors, called her “a leading hard money conservative.” “Hard money,” in this context, refers to wresting control of economic policy away from institutions like the Fed and linking the value of money to a fixed base, most typically gold. And, in fact, Ms. Shelton has not only called for the U.S. to go back on the gold standard, but for the world to do so.
What’s wrong with that? Gold bugs like Ms. Shelton maintain a religious—as opposed to an empirical—belief that linking currency to gold will lead to less inflation and more stable economic outcomes. But history teaches the opposite, which is really common sense. When currencies were tied to gold, the supply of the benchmark metal was neither stable, predictable, nor able to grow with populations and demands for greater economic activity.
That didn’t suppress inflation, it just made it more volatile. Same with growth and financial stability, both of which were much rockier when the gold standard ruled.
A key reason for that record is that being locked to the gold standard (or any such fixed regime) results in an inability of policy makers to respond to shocks. For economies across the globe, this has long been understood to be a bug and a major rationale for standing up an independent central bank. But for Ms. Shelton, such inflexibility is a feature.
Or, at least, it was. Now she’s mimicking Trump and is impersonating a monetary dove, calling for the Fed to aggressively cut interest rates (and doing so from the lobby of the Trump Hotel). Still, if you look carefully, you can see a hawk in dove’s feathers.
This gets a little technical, but it’s worth unpacking. In her newfound drive for easy money (low interest rates), Ms. Shelton has called for the Fed to stop paying interest on “excess reserves” held by its member banks. To stimulate lending during the Great Recession, the Fed loaned banks a lot more money than in the past (this is often described as the Fed “expanding their balance sheet”). Now, as the Fed slowly unwinds all this borrowing, it either pays interest on these reserves or it loses control of its benchmark interest rate. Were the central bank not to pay interest on these reserves, member banks would compete with each other to lend them out at ever lower rates until the target rate hit zero.
This decline in lending rates would please Ms. Shelton’s sponsor (Trump) to no end. But the next thing that would happen is that to regain control of their funds rate, the Fed would have to quickly get those excess reserves off their books. That means taking a lot money out of the banking system, and quickly. Such tightening would push the other way from Ms. Shelton’s scheme, raising rates.
In other words, in making a play for low rates, Ms. Shelton’s plan would deliver higher rates. At this point, I have no idea what she really wants. All I know is that she’s incoherent.
That said, there’s a theme to this plan that’s consistent with her previously held views, and it’s a way in which both Ms. Shelton and Trump want the same thing: to tie the hands of the Fed. Whether it’s her old gold standard or her new opposition to the way the Fed controls its funds rate, my foremost concern about her nomination is that Ms. Shelton will be Trump’s agent inside the bank and will do his bidding regardless of what the real economy needs.
And of this you can be sure: history is littered with economies that were brought to their knees because the central bank came under the thumb of a politician.
To be clear, Ms. Shelton is an accomplished economist and a provocative writer. But she also an actor, a political actor trying to get a part, one for which she’s uniquely unqualified.