Judy Shelton Was a Bad Fed Choice Even Before the Coronavirus

(Bloomberg Opinion) -- As the coronavirus spreads across the U.S., important parts of the economy are scaling back and financial markets are staggering. On Sunday, the Fed engaged in its most drastic actions since the global financial crisis over a decade ago, cutting interest rates to near zero and committing to purchase $700 billion in Treasuries and mortgage-backed securities. It’s hard to imagine a worse time to appoint a new Fed governor best known for fringe theories and questionable independence.

That’s why Republican senators who’ve opposed President Donald Trump’s nomination of Judy Shelton to the Federal Reserve Board shouldn’t back down.

Shelton’s fate rests in the hands of Republicans on the 25-member Senate Banking Committee, which could make its decision as soon as this month. All 12 Democrats on the committee will probably vote against her. That means a single no vote from a Republican member would block her nomination.

After a nomination hearing in mid-February, three GOP senators — Richard Shelby of Alabama, John Kennedy of Louisiana and Patrick Toomey of Pennsylvania — expressed concern about giving Shelton a role in setting the nation’s monetary policy, placing her confirmation in serious doubt.

But later in the month, Toomey announced his support. On Feb. 27, Bloomberg News reported Shelby’s answer to whether he would vote to send Shelton’s nomination to the Senate floor: “I could.”

He could, but he shouldn’t. Senators Shelby and Kennedy should hold firm.

There’s more at stake than a seat on the Fed board. Once seated, Shelton would become a leading candidate to become Fed chair in two years. Senators who voted for her nomination as a governor would be hard pressed to vote against her for the central bank’s top job.

Trump has made no secret of his unhappiness with Jerome H. Powell, the current Fed chairman. At a news conference on Saturday, the president mused over whether he could remove Powell from office before his term expires in 2022. “I think I have the right to do, to remove him as chairman, he is, he has so far made a lot of bad decisions in my opinion,” Trump said. He clearly won’t reappoint Powell.

Since being considered for a Fed governorship, Shelton has publicly changed her views on several critical issues, including the wisdom of very low interest rates and weakening the U.S. dollar to support exports. It is reasonable to be concerned that her views have changed to curry favor with Trump. And based on that, it is reasonable to be concerned that the president might want her as Fed chair when Powell’s term expires. The Senate should keep her off the short list for Powell’s successor by denying her a governor’s seat.

The coronavirus outbreak should focus the minds of Republican senators on the need for the leader of the Fed to inspire calm and confidence during a crisis — and to put in place the right policy response. Shelton’s long history of criticizing the Fed’s competence, objectives and even its existence would provide a shaky foundation for any crisis-management efforts. This would be especially true of a Chair Shelton.

For example, in 2009, she asked, “Why do we need a central bank?” In 2011, she described the Fed as “almost a rogue agency.” As recently as last year, Shelton expressed skepticism that a Fed objective should be promoting full employment. “I don’t know that that is really the Fed’s job,” she said in an interview with Bloomberg News.

Shelton’s views on monetary policy are far outside the mainstream. Too far. She has a long history of supporting the gold standard, which has been rejected by economists and abandoned by central banks. (In her hearing, she changed her view on this issue, as she has on others.) The gold standard is a recipe for economic instability. It also could dictate the wrong course of action in situations the Fed is likely to confront. As the U.S. entered the Great Recession in early 2008, commodity prices were increasing and the dollar was falling. The gold standard suggests increasing interest rates in this situation — exactly the wrong response.

Shelby has raised concerns about Shelton’s views. In late February, when his opposition softened, Shelby said, “The board’s big.” He continued, “If she goes on the Fed and she’s an outlier, she will not have much influence.”

Maybe so. But a Fed governor saying wacky things during a crisis as dire as the coronavirus pandemic is something to avoid. To say nothing of a Fed governor who would be on the short list for Fed chair.

If confirmed, Shelton would be a direct threat to the Fed’s independence from politics. That her views have changed so quickly on fundamental issues raises adequate suspicion for senators to vote against her nomination. But one needn’t speculate. In an op-ed published after Trump announced his intention to nominate her, Shelton openly called for less independence. “It would be in keeping with its historical mandate if the Fed were to pursue a more coordinated relationship with both Congress and the president,” she wrote.

Even if Shelton wouldn’t do the president’s bidding on the Fed — keeping rates low to run the economy hot for longer than is prudent, risking inflation — what ultimately matters is whether market participants think she might. Price inflation is determined in large part by what people think it will be in the future. If people think the Fed will set monetary policy not based on what is best for the economy’s long-term interest, but instead to help the president politically, prices will be pushed up. Public confidence in the Fed’s independence from politics is critical to keeping prices stable.

Senators Shelby and Kennedy: Hold firm.

All Republican senators: Imagine if someone with Shelton’s views and baggage were Fed chair today instead of Powell. Imagine a Fed governor going on television next week with a long history of arguing against very low interest rates, and that the Fed is not particularly effective or necessary, at a time when the world is looking to the central bank for economic support.

Vote no.

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

Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute. He is the author of “The American Dream Is Not Dead: (But Populism Could Kill It).”

©2020 Bloomberg L.P.

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