Here’s The Real Problem With Judy Shelton’s Fed Nomination

Admittedly, I had to force myself to weigh in on Judy Shelton’s appearance before the Senate Banking committee on Thursday.

It’s not that I’m suddenly uninterested. In fact, it’s the opposite.

Like so many stories involving the nexus between economics, finance and politics, by the time this exceedingly ridiculous tale finally reached its climax with Shelton showing up on Capitol Hill, I had already exhausted my creative capacity. I’ve lampooned Shelton’s nomination to death.

Previously, this story was a pleasure to cover because it afforded me so many opportunities to indulge my inner satirist, but now, it just feels redundant. At the risk of self-aggrandizing, some of my previous posts on Shelton cannot be improved upon.

On Thursday, Judy was grilled by Senator Sherrod Brown, and came under fire from Senators Richard Shelby and Patrick Toomey, as well. Toomey is concerned about Shelton’s allusions to the desirability of competitive currency devaluation (he called it “a dangerous path to go down”) and Shelby quizzed her about the gold standard (Shelton famously harbors something like nostalgia for a metals-based currency regime).

The real problem, though, is that Shelton doesn’t seem to have any set beliefs at all. “I pledge to be independent in my decision making. Frankly, no one tells me what to do”, she insisted, at one point during Thursday’s proceedings.

Senators will be forgiven for being skeptical. “[She’s] flip flopped [and] a vote for Ms. Shelton is a vote against Fed independence”, Brown remarked.

That strikes at what, in my opinion anyway, is the key issue with Shelton (well, besides being wholly unqualified): Her ideas aren’t hers. Or, at least not the ideas she’s championed since making it onto Trump’s radar screen.

There’s nothing at all wrong with thinking outside the box. But there’s something wholly perverse about claiming to do so when, in reality, your “new” thinking is diametrically opposed to your “old” ideas, and not because you changed your mind, but rather because you saw an opportunity to curry favor with the White House.

There is nothing – let me repeat, nothing – to suggest that Shelton had a real change of heart about her affinity for the gold standard or her palpable disdain for keeping rates low. Rather, she simply changed her tune for the sole purpose of appeasing Trump. If Trump wanted to switch to a ketchup-backed dollar tomorrow, Judy would show up on CNBC and extoll the virtues of tomato-based condiments.

With that as the context, I want to reprint a post from November for anyone who may have missed it. It strikes a good balance between humor and analysis, but more importantly, it gets at the heart of why we should be worried about Judy Shelton.

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“Here’s The Problem With Judy Shelton (It’s Not What You Think)”, as originally published November 22, 2019

The last time we checked in on Trump Fed pick Judy Shelton, she was being interviewed (again) on live television by CNBC’s Rick Santelli.

If that sounds like a segment that would make a rational person want to wash their eyes out with bleach, that’s because it was. During the interview — which CNBC ran on August 1 — Shelton did her best to reconcile competing narratives, arguing for larger rate cuts while still expressing skepticism about the general thrust of monetary policy in the post-crisis world.

“The effect of a 25bp [rate cut] is like tasing an inert body”, Shelton mused, in a wholly disturbing choice of metaphor that makes you wonder how many “inert bodies” Judy has maybe “tased” in her day. “It’s not causing any growth to be stimulated”, she continued. (Shelton called for a 50bp rate cut in July.)

It was the second time in less that two months that Shelton and Santelli chatted. Both segments were clinics in cognitive dissonance on Shelton’s part.

In early July, Shelton lamented the reality of negative rates, which she said disincentivize people from “investing that financial seed corn in the possibility of a greater harvest”.

Despite Judy’s concern for your “seed corn”, she argued, during the same interview, for Fed cuts at a time when the unemployment rate is parked at a five-decade nadir.

In other words, Judy is more than happy to argue against rate cuts and sing the praises of a gold standard, right up until that competes with Trump’s views on the proper course for monetary policy, in which case she’ll talk out both sides of her mouth, live on television.

Shelton, you’re reminded, isn’t even sure there should be a Fed at all, despite being nominated for its board.

But, since there is a Fed, she figures it might as well be totally beholden to the whims of the executive, even when that executive harbors views on monetary policy that are diametrically opposed to her own.

According to a transcript of an interview Shelton gave to Beat Siegenthaler, global macro adviser for UBS, Judy said the following:

I don’t see any reference to independence in the legislation that has defined the role of the Federal Reserve for the United States.

Obviously, that’s a disaster for Judy’s nomination, which is already on hold — although not necessarily because of anything she’s said or done “wrong”. Both she and Christopher Waller (whose prospective nomination represents a rare nod to sanity from Trump) are completing ethics reviews.

While one assumes Waller’s confirmation would be a foregone conclusion, sources told Bloomberg (which originally reported Judy’s comments) that some GOPers in the Senate are concerned about Shelton’s “unconventional” views.

In May, for example, she told the Financial Times she’d like to convene a new Bretton Woods-style conference at Mar-a-Lago to reset the the international monetary system. (And no, that is not a joke.)

Judy has also called into question the dual mandate.

In the interview with Siegenthaler, Judy called Trump’s over-the-top Fed criticism “healthy”. To wit:

It’s in some ways healthier that criticism from the White House is out in the open. At least we know how the president feels.

We sure do, Judy. Trump has, at various intervals, accused the Fed of reveling in the misery of America’s struggling manufacturers and deliberately undermining America’s competitiveness on the world stage. The Fed, Trump said in September, is staffed by a gang of “boneheads” who, if they had any sense, would “get our rates to zero or below” so that Steve Mnuchin could “refinance our debt”.

The issue for markets in all of this is that you can’t have someone who openly calls for a non-independent Fed appointed to the Fed board. It would undermine confidence in the dollar and, by extension, in US debt.

That said, the real problem isn’t so much that Shelton appears to be advocating for a politicized central bank. MMT advocates will tell you it’s just a matter of time before monetary policy and fiscal policy become joined at the hip anyway, in what amount to public-private partnerships to bolster growth with a kind of “people’s QE”. And historians will tell you the Fed was never truly “independent” in the first place.

Rather, the problem with Judy’s remarks is that she is clearly just pandering to Trump, as opposed to expressing a reasoned opinion on the proper relationship between elected officials and the central bank.

That is, this isn’t an economist (Judy isn’t an economist — she does have a PhD, but it’s not in economics) weighing in on how she sees monetary policy evolving in an era where it may be necessary to rethink traditional dynamics in an effort to better serve the public. Instead, this is a political appointee preemptively pledging her loyalty to an executive who is currently being investigated for abuse of office.

For evidence of this, look no further than Judy’s willingness to argue for aggressive rate cuts in the very same interviews that she laments the deleterious effects of low rates.

That Dr. Jekyll/Ms. Hyde act was on display in the UBS interview. For example, Shelton decried the extent to which central banks are beholden to the market, noting that the Fed “wouldn’t dare pull the monetary rug out from under market expectations, even if it wanted to discipline” them.

And yet, that dynamic — i.e., the extent to which the Fed has to be careful to avoid wrong-footing rates markets in the interest of not accidentally catalyzing an unwanted tightening of financial conditions — has been hijacked by Trump in the interest of cornering the Fed into rate cuts.

She went on to remark that “Someone could say it’s the central banks that are the currency manipulators”. Trump has said just that, but he’s also implored the Fed to “play the game”.

Since being tipped as a possible Trump Fed nominee, Shelton has made no secret of her unorthodox views and has clearly attempted to capitalize on the sudden demand for Judy Shelton cameos. But, as Bloomberg wrote, “White House officials have asked her to stop agreeing to interviews… out of fear that she may say something inflammatory that could scupper her confirmation in the Senate”.

Too late!

Her remarks to UBS have now virtually ensured that her nomination is untenable. Especially coming as it does on the heels of Trump’s universally lampooned attempt to get famous idiot Stephen Moore and pizza baron Herman Cain appointed.

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