Judy Shelton Would Destroy Trump’s Pro-Worker Legacy

(Bloomberg Opinion) -- Despite some unorthodox and occasionally disconcerting rhetoric, President Donald Trump has mostly succeeded in making both his party and the Federal Reserve more attentive to the needs of the working class. If Judy Shelton is confirmed to the bank’s board of governors, that progress would be at risk.

It’s worth stepping back and looking at what Republican monetary policy was before Trump. After the Great Recession, congressional Republicans were obsessed with maintaining the strength of the dollar in general and monitoring the price of gold in particular.

This “hard money” policy made sense in the late 1970s, when the U.S. was grappling with rising inflation and declining growth. From the 1980s onward, however, the U.S. has experienced declining inflation. Paul Volcker, the late Fed chairman, was so successful in fighting stagflation that when the Great Recession hit, the Fed was more concerned about avoiding a deflationary spiral than with sparking runaway inflation. Yet both Ben Bernanke and Janet Yellen faced resistance from a Republican Congress.

Trump changed all that. First and most important, he named Jerome Powell Fed chairman. The president has often expressed displeasure at having appointed Powell, but the truth is that the two broadly agree about how monetary policy needs to change.

Powell has led the charge against a hard-money policy. He has publicly declared that low inflation, not high inflation, is the challenge of the 21st century. Unlike his predecessors, he has rejected the idea that the Fed should preemptively raise interest rates to head off inflation.

Instead, Powell has turned the Fed’s focus toward the job market. Keeping interest rates relatively low has allowed employment growth to remain brisk even at low levels of unemployment. Wages are finally rising, and millions of workers have been drawn back into the labor force.

Second, while Trump’s criticism of Powell is wholly inappropriate, his critique of the Fed is broadly correct. His main complaint is that the Fed is insufficiently pro-growth — that it is failing to reduce interest rates fast enough, for example. At times it has seemed as though the president’s efforts might backfire, forcing Powell to be less pro-growth just to prove his independence.

If anything, the opposite has happened. Powell’s consistent policy explanations and data-driven approach have calmed any fears that he is caving to Trump. At the same time, the president’s attacks have inoculated Powell from any Republican criticism that he might be moving too far in a pro-growth direction. Unlike either Bernanke or Yellen, Powell has a strong relationship with Republicans and Democrats in Congress.

Appointing Shelton would undermine Trump’s achievements on both these fronts. Shelton has long been an intense hard-money advocate and supporter of putting the U.S. back on a gold standard. In interviews last year after Trump announced his intention to nominate her, she complained that even 2% inflation was too high. More recently, in a clear effort to appease the president, she has begun advocating for drastically lower interest rates.

This inconsistency, combined with a predilection for a hard-money policy, endangers everything that has been achieved under Powell. Even more damaging, there is talk that Trump might push to replace Powell with Shelton. That means there is probably an effort within the White House to use her nomination to undo the GOP’s move toward a pro-growth monetary policy.

Such a reversal would not only destroy the progress that has been made under Trump, it would also be disastrous for American workers. Senate Republicans should reject Shelton’s nomination. The president deserves a Fed governor who will work to preserve his legacy.

To contact the editor responsible for this story: Michael Newman at mnewman43@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Karl W. Smith, a former assistant professor of economics at the University of North Carolina and founder of the blog Modeled Behavior, is vice president for federal policy at the Tax Foundation.

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