Last summer, President Trump announced that he would nominate Judy Shelton, a conservative economist, to serve on the Board of Governors of the Federal Reserve. The Senate took little action towards confirming her until this month, when the Senate Banking Committee held her nomination hearing.
While the Fed is an independent agency that is intended to operate without political pressure, the seven members of the Board of Governors are nominated by the president to fourteen-year terms. The members of the Board of Governors serve on the Federal Open Market Committee, the policymaking body that adjusts interest rates in response to changes in economic conditions. The members of the Board of Governors exert considerable influence over the trajectory of the economy through their position on the FOMC. It is crucial that nominees have deep knowledge about monetary policy and resist political pressure to manipulate interest rates. Shelton is unqualified to serve on the Board of Governors, and her extreme views and willingness to pander to Trump will endanger both the health of the economy and the Fed’s independence.
Shelton isn’t just a conservative economist — her views are completely out of the mainstream, and economists of differing ideologies disagree with her positions on economic policy. She has advocated returning to the gold standard, a system where economies fix their currencies to gold and Treasury bonds could be redeemed for actual gold. Many economic historians blame the gold standard for worsening the Great Depression. The gold standard was abandoned in the 1970s, and virtually no economists think adopting the gold standard again would be a good idea. She has also expressed that all of North America should adopt the same currency and that the federal government shouldn’t insure deposits. No sensible economist, no matter their ideology, believes that these policies are a good idea. The stability of the economy depends on calm, steady guidance from the Fed because the FOMC’s interest rate decisions are a clear indicator of how the economy is doing. The chair and other members of the Board choose their words in public statements with care to avoid spooking financial markets. Shelton’s ludicrous and erratic policy proposals could be highly destabilizing. No one with input on the Fed’s important monetary policy decisions should have views that are so far from mainstream economics.
Perhaps even more worryingly than her out-there policy views, Shelton might cave to political pressure in setting interest rates. Politicians generally prefer low interest rates because low interest rates spur economic growth in the short term, and politicians’ reelection chances improve when the economy is strong and unemployment is low. It is extremely important that the Fed only consider economic conditions and not politics when setting interest rates because too-low interest rates could lead to a number of adverse outcomes, including high inflation. The Fed’s status as an independent agency is central to its identity, and its staff fiercely guards that independence. Shelton, on the other hand, has been cavalier about the Fed’s independence and has proven very willing to craft her public statements to appeal to Trump’s views. For example, she called for higher interest rates during the Obama administration and then immediately advocated for large interest rate cuts at the beginning of the Trump administration. Trump has already violated norms against commenting on monetary policy and tweeting criticism of Fed chair Jerome Powell, so it is crucial that the Board members during his administration are particularly resolute in their commitment to Fed independence. Shelton cannot be trusted to resist pressure from the president, as she has been a prominent Fed critic for years. In a Wall Street Journal opinion article in 2009, she even questioned whether the US should even have a central bank. Her deep suspicion of the Fed suggests that she’s not committed to the Fed’s mission and might be swayed by political pressure. Thankfully, Fed experts expect Shelton’s nomination to be withdrawn, as Republican senators have expressed concern about parts of her record, including her support of the gold standard. Even though she will probably never serve on the Board, her nomination is yet another sign of the erosion of norms that has occurred during the Trump administration. As the New York Times editorial board wrote in early February, Trump’s nomination of Shelton “amounts to an attack on the Fed’s congressional mandate” to maintain low inflation and maximum sustainable employment.