As Congress Prepares to Vet Judy Shelton, Worries About the Fed’s Future Mount


WASHINGTON — Senators will vet Judy Shelton, a prominent Federal Reserve critic, for one of the central bank’s top jobs on Thursday, a moment that many economists will be watching closely because they see her as a potential threat to the central bank’s prized independence.

Ms. Shelton has rhetorically questioned whether America even needs the Fed. She is a longtime fan of pegging the value of the dollar to some common anchor, like gold, a stance that America abandoned decades ago and one that would fundamentally change the nature of the central bank. Despite those unconventional views, she is one of President Trump’s two candidates to fill the last remaining seats on the Fed’s seven-member Board of Governors in Washington.

But it is not just her heterodox economic views that are making former central bankers and top economists wary, according to interviews. It is the possibility, based on her track record, that Ms. Shelton could bend her positions to suit Mr. Trump’s preferences, subordinating monetary policy to the White House’s desires.

The stakes are high. While individual Fed governors have just one vote out of 12 on monetary policy, she could be a natural pick to be the central bank’s next chair should Mr. Trump win re-election. That would put her in a position to change the fabric of the institution. While Fed chairs must build consensus among their colleagues, they have historically been the central players in American monetary policy.

“When someone is qualified, shades of gray on their politics, you just don’t care — but when it seems like they’re willing to usurp all economics for political gain, that’s when you’ve crossed a line,” said Diane Swonk, chief economist at the accounting firm Grant Thornton. “It’s mind-boggling. It’s disturbing. It’s dangerous, as well, because of the potential for her to be the next Fed Chair.”

Mr. Trump has spent the past 18 months blasting his hand-chosen Fed chair, Jerome H. Powell, for keeping interest rates too high. That suggests Mr. Trump, if he were to win re-election, might not reappoint Mr. Powell when his term as chair expires in early 2022.

Ms. Shelton would be one potential replacement. Mr. Trump could also tap one of the other governors he has picked — including Christopher Waller, who is currently research director at the Federal Reserve Bank of St. Louis and was nominated to the board alongside Ms. Shelton.

Mr. Waller, who will also face Senate scrutiny on Thursday, was an academic before joining the Fed and has a résumé and record of research more typical of central bankers. For years, the St. Louis Fed has doubted for years that low unemployment would spur higher inflation, and White House economic adviser Larry Kudlow has highlighted that skepticism as a key reason that the president tapped both Mr. Waller and Ms. Shelton.

Given the tension between Mr. Trump and Mr. Powell, “there’s reason to think he’s looking at Fed Governor nominees and thinking about a future Fed Chair,” said Michael R. Strain, director of economic policy studies at the American Enterprise Institute. “That suggests a higher level of scrutiny of these nominees is important.”

Ms. Shelton’s public campaigning for the Fed job, which included a series of media interviews she arranged in the lobby of the Trump International Hotel in Washington, has helped to spur speculation that she might become a favorite to replace Mr. Powell. So has her friendship with Mr. Kudlow and her willingness to change her views.

Ms. Shelton called for higher interest rates in the wake of the Great Recession, and as recently as 2016. Since Mr. Trump’s election, she has spoken out in favor of cuts.

She initially couched her change of position as technical: She said she wanted to cut rates in order to phase out the Fed’s post-crisis practice of paying interest on excess money that banks deposit at the central bank. More recently, she has said that lower rates would allow the economy to grow uninhibited as the administration’s policies fueled higher investment and productivity. (That boom has not materialized).

“When you have an economy primed to grow because of reduced taxes, less regulation, dynamic energy and trade reforms, you want to ensure maximum access to capital,” she told The Wall Street Journal’s editorial page.

She has also questioned the basis of the Fed’s independence from the White House, even as she acknowledged that central bankers believe that distance shores up their credibility.

“I don’t see any reference to independence in the legislation that has defined the role of the Federal Reserve for the United States,” she said, in a question-and-answer session in Washington last year. Related legislation “demands that the Board of Governors of the Federal Reserve work hand-in-hand with Congress and the President to meet certain strategic economic goals for the United States.”

Ms. Shelton would hardly be the first appointment to the seven-member Fed Board with a heavy partisan lean. President Ronald Reagan, who was not a fan of Fed independence, stacked the Fed with enough supporters to challenge then-Chair Paul Volcker.

But current Fed officials robustly defend the central bank’s independence from politics, and Mr. Powell often says that interest rates are set with an eye toward the economy alone because the Fed avoids “mistakes of character.” History suggests, and some research shows, that politically-tied central bankers can favor policy that hurts the economy in the longer run.

Ms. Shelton is expected to face pointed questioning at her confirmation hearing on Thursday before the Senate Banking Committee and must ultimately win confirmation from the full Senate.

Bankers are skeptical of Ms. Shelton’s nomination. One senior financial services executive said that her questioning of the Fed’s independence, her skepticism of the need for deposit insurance, and her track record of advocating an anchored currency are areas that would draw lawmaker questions.

Congress has been in the Fed’s corner during much of Mr. Powell’s tenure. When the chair testifies on Capitol Hill, as he did this week, he is assured that the Fed’s independence is valued. Senators have previously shot down possible Trump administration appointments to the Fed’s board that were viewed as partisan and problematic: conservative commentator Stephen Moore and former pizza executive Herman Cain were talked about for the job but never formally nominated after lawmakers expressed concern about their past statements and actions toward women.

Lawmakers have approached Ms. Shelton’s nomination more cautiously.

Senator Kevin Cramer, Republican of North Dakota, who had cooled on Mr. Cain, has called Mr. Waller and Ms. Shelton “well qualified.” Senator Mike Rounds, Republican of South Dakota, made a case for diverse views at the Fed while questioning Mr. Powell at a Senate Banking hearing on Wednesday.

Past Fed nominees have scuppered their chances during their Senate testimonies. But Ms. Shelton has already passed Senate confirmation once, when Mr. Trump nominated her as the American envoy to the European Bank for Reconstruction and Development. She is a practiced public speaker.

If Ms. Shelton is confirmed for the Fed but never elevated to the chairmanship, she will have more limited room to shake things up since individual governors hold just one vote on monetary policy, alongside their six fellow board members and five regional Fed presidents.

But there are ways in which she could still exert influence. Narayana Kocherlakota, a former president of the Federal Reserve Bank of Minneapolis who was himself a contrarian at the Fed, noted that Mr. Waller and Ms. Shelton could form a coalition.

While no governor has voted against a monetary policy decision since 2005, Mr. Waller “is his own person,” said Mr. Kocherlakota, who said he knows him from years of conferences. “The Chair would listen to a bloc of two governors, simply because he wouldn’t want two governors to dissent.”

Governors have also historically used public remarks to shape broader policy discussions. Such activism can help to rein in groupthink — or it can be used to serve a political agenda.

“If Dr. Shelton comes onto the board of governors and just represents a different point of view, there is no harm to it and possibly some good,” said Adam S. Posen, president of the Peterson Institute for International Economics. “If, however, this is an attempt to politicize the board’s discussion and possibly undermine the chair,” then “that would be a loss for the whole country.”

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