President Trump is having a rough go when it comes to filling seats on the Federal Reserve. In the first part of his presidency, Trump filled three Fed spots, and promoted Jerome Powell to Fed Chair. But more recently, Trump's gone zero-for-four: His last two nominations, Marvin Goodfriend and Nellie Liang, ran aground in the Senate. Then Herman Cain and Stephen Moore so horrified mainstream policymakers that the White House never even officially nominated them.
Trump's earlier Fed nominees were thoroughly mainstream, in both their background and their views on monetary policy. But Cain and Moore represented a far more, well, Trump-ian approach. The White House's latest potential pick, economist Judy Shelton, suggests Trump intends to stick to the latter course.
Here's a basic sketch of the impasse: Trump does not seem to have any coherent views on monetary policy, beyond a purely self-interested desire for lower interest rates in the short term to boost economic performance — and thus his chances at re-election. The problem is most mainstream candidates who would appeal to the center-right and the center-left generally support interest rates that are a bit higher than Trump's preferences. Meanwhile, there's a large contingent of Republicans who, out of devotion to both small government and a free market unsullied by government interference, want an even more hawkish stance on interest rates than their center-right compatriots, and who also want to drastically reshape U.S. monetary policy by reimposing something like a gold standard.
Back in the earlier days of his presidency, when Trump didn't appear to care who he nominated to the Fed, these contradictions could be ignored. Now that Trump does seem to care a great deal, finding nominees who fit Trump's preferences and can pass the Senate and can do so without alienating large parts of the GOP is proving exceedingly difficult.
This brings us back to Shelton. Granted, she's still being vetted at this point; the White House may not nominate her at all. But she has a more mainstream-friendly pedigree than Moore or Cain: in 2018, she was confirmed by the Senate for the U.S. director post at the European Bank for Reconstruction and Development. And she reportedly has the ear of Larry Kudlow, Trump's top economic advisor. If she is nominated, she will bring a decidedly unusual mix of monetary policy views with her.
Shelton would like to alter the way the Fed adjusts interest rates in a way that's kind of boringly technical but might lead to lower interest rates in the short term. But she'd also like to move both American monetary policy and the global currency market back onto something like the gold standard. That isn't just a radical departure from mainstream preferences, it would be a disaster on the merits.
Let’s take them in order. For much of its history, the Fed adjusted interest rates up and down by adjusting the supply of reserves in the banking system up and down — which it did by buying or selling U.S. Treasury bonds. Then the Great Recession hit, and the Fed flooded the system with reserves to try and fight the collapse. That rendered the central bank's old approach to adjusting interest rates moot. Now the Fed itself pays the banks interest on their reserves. The idea is that there's no reason for a bank to ever charge anyone a lower interest rate than it can get from the Fed, so this creates a floor the Fed can adjust up and down.
Shelton objects to this system and wants the Fed to go back to the old way of doing business. It's not obvious this is even possible: The need to restrain inflation with higher interest rates might arrive long before the Fed has sold off enough Treasury bonds to get a handle on the supply of reserves again. But attempting it would probably lead to lower interest rates in the short term.
Shelton's sanguine about those lower interest rates for a very Trump-friendly reason: She thinks the 2017 tax cuts increased the economy's productivity, which should allow it to absorb more aggregate demand without additional inflationary pressure. Shelton might be accidentally correct about the economy's ability to absorb more demand, but not because of the tax cuts, which were a dud. We're just very likely further below economic capacity than we thought.
As for Shelton's desire to bring back an international gold standard, fixing the currency supply to some random outside metric — like the supply of a precious metal — shackles both monetary and fiscal policy from being able to respond to the ups and downs in the economy. Recessions become worse and they happen more frequently.
Furthermore, Shelton's defense of this idea is a complete mess. She argues that, because Nixon ended the gold standard in the 1970s, it was the period after that where "Keynesians quickly seized the opportunity to pursue fiscal activism without the constraints imposed by balanced budgets and the discipline of gold convertibility." But the mid-century Bretton Woods system was a "gold standard" without any teeth, and it was was actually the era from the New Deal up until the 1970s when Keynesianism enjoyed its heyday. Shelton also completely misses how the "free market" rules of liberalized trade, unhindered capital flows, and budget austerity all came to dominate international economic policy after the 1970s as well.
Shelton rightly condemns the post-1970s period as a disaster for international economic stability, but it makes no sense to blame the mess on the sudden disappearance of the gold standard, or on the influence of left-wing economic thinking, as she does.
Shelton's views, in other words, are incoherent. But they are incoherent in a way that might simultaneously appeal to both Trump and the more hawkish sections of the GOP. If she does get nominated, that will be the needle the White House is trying to thread.