Trump’s bizarre Federal Reserve nomination

Among President Trump’s more bizarre nominations for office has to be his nomination of Judy Shelton to fill one of the Federal Reserve Board governor vacancies.

It is not so much that Shelton manages to hold two contradictory views of monetary policy at the same time. It is rather that her strident advocacy of the return to the gold standard is totally inconsistent with the Trump administration’s economic policy approach. It would also seem to be a non-starter given President Trump’s “my way or the highway” attitude to international economic policy issues.

Normally a person would be in favor of either an easy monetary policy to stimulate the economy or a hard monetary policy to exert discipline on the government. Either way, one would not expect her to hold both views at the same time. Yet Ms. Shelton does exactly that.

She does so by fully supporting Trump’s repeated calls for lower U.S. interest rates while at the same time advocating the urgency of returning soon to the gold standard. She promotes the gold standard as a means to discipline budget policy and to prevent financial market bubbles.

A generous interpretation of Shelton’s simultaneously holding contradictory monetary policy views is not that she is intellectually confused but rather that, in order to win the president’s nomination, she is simply pandering to Trump’s desire for low interest rates in the run-up to the 2020 presidential election.

If that is the case, the Senate should not go along with her nomination on the grounds that if confirmed she would be more inclined to please the president than to make the difficult interest rate decisions that would be in the nation’s long-term interest.

The less generous interpretation is that Shelton is confused and does not see the contradiction between advocating low interest rates while also supporting the gold standard. If that is indeed the case, the Senate should block her confirmation on the grounds that she lacks the intellectual rigor to properly fulfill her role as a Fed governor. 

Sadly, Shelton’s strident views on the gold standard do not allow one to easily dismiss the less generous view that she is intellectually confused.

In advocating the return to gold, it seems to have escaped Shelton’s noticed that the last time that the U.S. dollar was linked to gold it ended in tears. It did so in 1971 when President Nixon was ignominiously forced to break dollar’s gold link as a result of budget profligacy associated with very large Vietnam related budget deficits. 

In a world of free capital movements, those deficits made it increasingly impossible for the U.S. government to honor its commitment to continuously supply gold to dollar holders at the promised rate of US$35 dollar an ounce.

The distinguishing characteristic of President Trump’s economic policy has been a very large unfunded tax cut at a time of considerable economic strength and a 50-year record low unemployment rate. According to the Congressional Budget Office, over the next ten years that tax cut will add $1.5 trillion to the national debt and lead to an average budget deficit of over 4.25 percent of GDP for as far as the eye can see.

A question that Shelton is not asking herself is this: If in 1971 budget profligacy forced Nixon to abandon the dollar’s gold link, why would Trump’s budget irresponsibility not do the same today?

Shelton also seems to be glossing over how difficult it would be for Trump to convince the rest of the world to join the United States to return to some sort of gold-linked fixed exchange rate system. She also seems to underplay how difficult it will be for countries to agree upon the appropriate exchange rates at which their currencies should be fixed to one another.

In 1944, when the United States lead the world to the Bretton Woods fixed exchange rate arrangement, its world standing and trustworthiness could not have been higher. Does Shelton really think that this is still the case after two years of a divisive U.S. import tariff policy and of President Trump’s seeming disdain for international cooperation? 

In sum, Trump might find in Shelton a useful and pliable Fed governor who will do his low interest rate bidding in the run-up to the 2020 election. But it would seem to be highly questionable whether Shelton is qualified to serve effectively and independently on the Federal Reserve’s Board. Accordingly, it would be a big mistake for the Senate to confirm her nomination.

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.