Fed Picks Shelton, Waller: Two Mavericks with Little in Common

(Bloomberg) -- One is a credentialed insider who’s spent years at the Federal Reserve. The other is an idiosyncratic outsider who’s questioned why the Fed even exists.

Now, these two wildly different economists have become part of President Donald Trump’s contentious effort to shake up the Fed and its powerful board of governors.

Fed Picks Shelton, Waller: Two Mavericks with Little in Common

The first, Christopher Waller, is a long-time Fed economist who seems almost certain to win approval from Democrats and Republicans on the Senate Banking Committee, which will take up his board nomination Thursday. The second, Judy Shelton, is another matter. If confirmed, Shelton would bring a radically different view of the Fed and its Congressional mandate to steer the economy -- and place a Trump loyalist at the very heart of the central bank.

Trump has repeatedly attacked the Fed and its chairman, Jerome Powell, for not doing more to boost the economy. If the president is re-elected in November and Shelton joins the board, she could be Trump’s pick to succeed Powell as chair in 2022.

Shelton Reservations

Senators from both parties have already voiced reservations over Shelton. Alabama Republican Richard Shelby said Wednesday that he’s undecided on whether to support her. One of the concerns surrounding Shelton is her past affinity for the gold standard. The other is her public support of Trump’s policies at a time when the Fed is defending its independence.

The senator, who sits on the Senate Banking panel, said his support would depend on what she told lawmakers during her confirmation hearing. A single Republican “no” vote on the committee is enough to block the Shelton nomination, assuming Democrats are united in opposition. The Banking Committee’s chairman, Republican Mike Crapo, said Wednesday he’s in favor of her nomination.

Once out of committee, she would require 50 of 53 Republicans to back her in a full Senate vote to win confirmation.

Utah’s Mitt Romney, the only Republican to vote for Trump’s conviction in his recent impeachment trial, has said he’s undecided, calling Shelton’s record “not terribly encouraging.”

Fed’s Mandate

Shelton, a former economic adviser to Trump’s presidential campaign, has challenged whether the institution should regulate the value of money and whether its mandate, as set by Congress, to pursue maximum employment, stable prices and moderate long-term interest rates is meaningful.

Fed Picks Shelton, Waller: Two Mavericks with Little in Common

“I would probably be highly skeptical of those,” Shelton said in a Bloomberg interview last year, referring to the mandate. “Those are such nebulous objectives.”

Meanwhile, Shelton has publicly praised Trump’s economic agenda. Independence from partisan politics is widely viewed as important for any central bank in pursuing effective monetary policy.

“She was running a political campaign to get nominated -- that is unprecedented,” said Brian Bethune, an economist at Tufts University. “The whole idea that somehow the Federal Reserve is going to move into the West Wing is extremely dangerous. Any notion of politicization would cause a train wreck in terms of the Fed’s credibility.”

Shelton did not respond for a request for comment and Waller declined to comment. In prepared remarks for the hearing released Wednesday, Shelton said if she was confirmed that her priority would be “to support monetary policy that facilitates productive economic growth while also ensuring the soundness and stability of the U.S. financial system.”

Waller’s Views

Waller, who is currently the research director at the St. Louis Fed, is less controversial but would also likely challenge the consensus policy prescription on the Federal Open Market Committee, the Fed’s rate-setting panel. His decades of research show a ranging intellect probing everything from government corruption to political attacks on the central bank.

He helped develop his boss James Bullard’s view that the economy is stuck in a new regime of low interest rates, low growth and low inflation. It’s a stance that raised eyebrows when introduced in June 2016, but has since been vindicated, not least by three rate cuts in 2019.

Waller used the word “accountable” three times in his prepared testimony and pledged “to implement policies that help us meet our dual mandate.”

“The big advantage Chris has is years of experience within the Fed,” said Peter Ireland, a professor of economics at Boston College who worked at the Richmond Fed in the 1990s. “He clearly is going to come in with an understanding for how the system works and what the institutional constraints are, whereas Judy is a real outsider.”

Property Rights

Ireland believes Shelton may opt to take a more practical approach if she makes it to the Fed, but her ability to be effective is a legitimate question, he said.

“Is she someone who’s capable of operating within the system, or is she simply going to be a curmudgeon?” he said.

The Fed is a consensus-driven institution. Dissenters get a hearing in the policy process, but off-beat views usually get isolated. For example, Wayne Angell, a governor from 1986 to 1994, had nostalgia for the gold standard like Shelton and used commodity prices as a reference point for inflation. He spoke about the idea with former Chairman Paul Volcker and Fed staff but they never ran policy on a commodity-price standard.

Shelton’s attraction to policies like the gold standard is her conviction -- expressed in numerous articles and interviews -- that a democratic government exists first and foremost to protect private property rights, a standard libertarian concept. That property includes not only money, but money at its current value.

“Instead of establishing a sound money foundation that would permit free-market mechanisms to optimize capital flows and maximize long-term economic growth, we have empowered central banks to engage in central planning,” Shelton wrote in the Cato Journal in 2015. “We have amplified the influence of government over the voluntary transactions of individuals operating in the private sector.”

Laurence Meyer, a former Fed governor who served when Alan Greenspan was chairman, said people who have alternative views about the structure of the economy and the nature of inflation can make a positive contribution. Then, he added, there are gold standard advocates “who don’t trust unelected officials to carry out policy.”

In her testimony, Shelton appeared to address those who see her as a threat to the Fed.

“Combining academic perspective with real-world insights, I hope to contribute intellectual diversity as a governor and would work collegially to promote sound money and sound finances,” she said in her prepared testimony.

©2020 Bloomberg L.P.

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