White House Executive Mansion decorates portraits of president McKinley and Roosevelt

Trump's Fed Nominations Advance but Questions Remain About Judy Shelton

The White House recently placed two portraits of former presidents William McKinley and Theodore Roosevelt prominently in the entrance of the executive mansion while relegating those of more recent chief executives, George W. Bush and Bill Clinton, to a small, rarely used room.

White House Executive Mansion decorates portraits of president McKinley and Roosevelt

At the same time, President Donald Trump appears to be getting a Federal Reserve Board governor who would also be endorsed by McKinley as the Senate Banking Committee on Tuesday narrowly voted along party lines to send the nomination of Judy Shelton to the full Senate.

McKinley was a strong advocate for the gold standard, which Shelton has endorsed in past writings, and which was the economic orthodoxy at the turn of the 20th century. He defeated his populist Democratic challenger, William Jennings Bryan, who inveighed against "the cross of gold" in 1896, and again in 1900. McKinley signed the Gold Standard Act of 1900, which eliminated silver's role in backing the dollar.

Shelton's nomination isn't so much controversial for advocating for a something like McKinley-era monetary policy as it is for apparently backing policies based on who currently occupies the White House.

The candidacy of Judy Shelton, an economic adviser to Mr. Trump's 2016 presidential campaign Shelton, an adviser to Trump's 2016 presidential campaign, criticized the Fed for keeping interest rates low and expanding its balance sheet by purchasing Treasury and agency mortgage-backed securities, a process popularly called quantitative easing, during the Obama administration. But she joined President Trump's call for the Fed to lower rates last year with the U.S. economy at full employment before the coronavirus crisis.

Shelton has defended her view, contending the Fed has too much power that it uses to peg the overnight interest rate, which critics liken to government price fixing in a command-and-control economy. Her defenders say Shelton would provide needed diversity of opinion away from what they call groupthink at the central bank resulting from the similar viewpoints and academic backgrounds of the Fed staff and officials.

But the main concern about Shelton is that she could possibly be named to replace Jerome Powell when his term as Fed chairman expires in 2022 if Trump is re-elected. Critics worry the Fed would effectively lose its independence if a political ally took the reins of the central bank.
That would be a greater risk than having the U.S. economy being put back into golden fetters, to use the term of economist Barry Eichengreen. In his history of the Great Depression, countries that removed those fetters from their currencies were the first to begin to recover.
Shelton contends that the dollar should be stable to provide predictability of its purchasing power. But that means the economy has to be inflated and deflated to fit the dollar's exchange rate, rather than letting the dollar fluctuate according to market forces.

One of the ironies of Shelton's nomination is that another nominee, Charles J. Waller, head of research at the St. Louis Fed, also was voted by the Senate Banking Committee. The St. Louis Fed has been an independent redoubt of monetary theory among the 12 district banks and the Fed Board in Washington. In the 1960s and 1970s, the St. Louis Fed was a strong advocate of the monetarist school led by Milton Friedman, advocating for the steady growth of the money supply, which required allowing the dollar to fluctuate freely.

More recently, the St. Louis Fed has continued its independence under its president, James Bullard, who has been in favor of lower interest rates. He dissented last year in favor of more aggressive cuts by the policy-setting Federal Open Market Committee and voted against a rate increase in 2017. Waller's research department is thought to have buttressed Bullard's thinking.

The ultimate irony in Shelton's preference for a role for gold in Fed policy is that the metal's rally -- up another 1.5% Tuesday and up 25% from its March low, to $1,842.40 for July Comex futures, the highest since Sept. 9, 2011 -- would be arguing for tighter policy. Now hardly is the time to pull back on the Fed's monetary stimulus while the economy remains mired in a deep recession with the highest unemployment since the 1930s.

Trump Fed Nominees Shelton, Waller Confirmed by Senate Committee

WASHINGTON -- A controversial Trump administration nominee for the Federal Reserve's policy-making board cleared a major hurdle in her path to confirmation Tuesday after a Senate panel voted to support the choice.

The candidacy of Judy Shelton, an economic adviser to Mr. Trump's 2016 presidential campaign, for the Fed's Board of Governors was approved by the Senate Banking Committee in a party-line vote despite objections from Democrats. Her next and final stop will be a confirmation vote on the Senate floor, where Republicans hold a 53-47 majority.

Shelton has been a longtime proponent of a return to the gold standard Senators on the panel also voted 18-7 to advance the nomination of St. Louis Fed director of research Christopher Waller to fill the remaining vacancy on the central bank's seven-member board in Washington.

The Fed board has played an especially important role in combating the economic fallout from the coronavirus pandemic. The larger Federal Open Market Committee, which includes the governors plus five regional bank presidents, votes on interest-rate decisions. But it is the board that decides on the emergency lending programs the Fed has created to lend to companies, cities and states since the crisis began.

Ms. Shelton has been a longtime proponent of a return to the gold standard, which would limit the Fed's ability to influence inflation and employment, and concedes that her views are outside the mainstream of economics.

Under normal circumstances, an unorthodox voice on the board would be unlikely to have a big impact on the speed or direction of decision-making, said David Wilcox, who served as the top economist at the Fed board from 2011 to 2018. During a crisis, that could be different.
"This is no spot for on-the-job training," Mr. Wilcox said. "The heat of a crisis is no time to rehash ideas that were abandoned half a century ago and are studied today only in the context of learning lessons about what not to do."

The nominations could take on extra significance if Mr. Trump wins reelection this year because he could tap a sitting governor to succeed Fed Chairman Jerome Powell when his four-year term expires in early 2022. Mr. Powell and his two predecessors had served on the Fed's board before becoming its chair.

Ms. Shelton's influence could also grow if any of the current Fed governors depart during her tenure. Emergency lending programs of the sort implemented during the pandemic require the votes of at least five governors, potentially giving any one of them veto power if the board is staffed by five or fewer members.

Before the coronavirus pandemic and related recession forced the central bank to slash interest rates to near zero and unleash a wave of measures to support the economy, Mr. Trump had regularly lambasted Mr. Powell for keeping borrowing costs, in his view, too high.
Ms. Shelton supported Mr. Trump's calls for lower rates, after earlier criticizing the Fed for keeping rates too low during the tenure of President Obama.

Democrats were concerned that Ms. Shelton's shifting views on interest rates were a sign that she wouldn't decide policy independently of political considerations if she were to join the board.
Following her confirmation hearing at the banking committee in February, three Republican senators -- Pat Toomey of Pennsylvania, Richard Shelby of Alabama and John Kennedy of Louisiana -- had expressed doubts about Ms. Shelton's aptitude for the Fed board.

Messrs. Toomey and Shelby later said they were prepared to support her candidacy. But the White House secured Mr. Kennedy's vote only recently, which allowed the banking committee to schedule a vote earlier this month.

Shelton, an adviser to Trump's 2016 presidential campaign, criticized the Fed for keeping interest rates low "I spent a lot of time reading a lot of Dr. Shelton's works," Mr. Kennedy told reporters Monday. "My criteria for judging any Federal Reserve nominee is: Does the nominee have the intellectual heft to do the job? And No. 2, will they be independent? And she satisfied both of those criteria."

Mr. Kennedy added that Senate Majority Leader Mitch McConnell (R., Ky.) will likely "move her nomination pretty quickly" after she is approved by the banking committee.

A spokeswoman for Mr. Kennedy declined to say which of Ms. Shelton's writings the senator had read, or when.

All 12 of the Democrats on the banking panel signed a letter to the committee's chairman, Sen. Mike Crapo (R., Idaho), this month asking for a new hearing.

Ahead of Tuesday's vote, Mr. Crapo said that Ms. Shelton had answered all of the questions Democrats raised in the letter during her February hearing.

"I'm confident that her deep understanding of the Fed's monetary policy tool kit, monetary history and commitment to maintaining Fed independence will serve the Fed well in its continuing efforts to stabilize markets and toward its mission of price stability and full employment," Mr. Crapo said.

At the February session, Ms. Shelton responded to a question on how she would handle a rise in the unemployment rate to 6.5% from 3.5% by saying initially, "It is hard to imagine that situation." She then said that she might "very reluctantly" support asset purchases by the central bank -- a measure she frequently criticized after it was first implemented during the 2007-09 recession.

Since then, the jobless rate has risen as high as 14.7% in April. The Fed has unleashed trillions of dollars in asset purchases and other extraordinary measures that, economists say, played a critical role in stabilizing credit markets and staving off a full-blown financial crisis.

"The Fed's independence and stability matter even more during a crisis, like the one we are facing today," Sen. Sherrod Brown of Ohio, the ranking Democrat on the banking committee, said in a statement Tuesday.