President Trump still has two seats on the Federal Reserve's Board of Governors to fill. His last two picks filled mainstream elites and policymakers with such universal horror that they never were officially nominated. Late yesterday, Trump took another stab, announcing his intention to nominate Judy Shelton and Christopher Waller.
Shelton is a thorough "dog bites man" pick — by which I mean her monetary policy views are a mess and seem to shift in accordance with whatever Trump wants. So of course the president wants her on the Fed.
Waller, on the other hand, is definitely "man bites dog."
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One of the many things that repulsed everyone about Trump's two previous picks — Herman Cain and Stephen Moore — was their complete lack of relevant experience. You can debate how wise it is for Fed officials to be drawn exclusively from the insider track. But Trump's willingness to go outside that track is one of the defining characteristics of his administration. And the first thing that makes the Waller pick so striking is his insider pedigree.
Waller's an economics PhD and a former professor at the University of Notre Dame. Since 2009, he's worked as the director of research for the Fed's St. Louis branch, where "his key research focus has been on monetary and macroeconomic theory and the political economy," according to Bloomberg.
In keeping with his mainstream pedigree, Waller is also on record as a staunch defender of the Federal Reserve's political independence from the executive branch. "The Federal Reserve System is a well-designed institution, created by Congress, that keeps the government from relying on the printing press to finance public spending," Waller wrote in 2011. "It is independent, credible, accountable, and transparent. It is a nearly 100-year-old success story that has served the nation well."
That's an analysis you could certainly take issue with; in fact, I myself would take issue with it. But what's important for our purposes here is that while Trump surely isn't familiar with the substantive debate over this topic, his instinct has certainly been to hold the norm of Fed independence in contempt. Again, the choice to nominate Waller is striking because of how much he doesn't fit with Trump's revealed preferences in this regard. (Admittedly, Trump may have concluded that he'll get an apparatchik in Shelton and can thus afford a more potentially troublesome pick in Waller.)
But what really stands out about Waller is he may finally provide a solution to a dilemma that's bedeviled Trump on monetary policy from the beginning.
The president has made it quite clear he prefers lower interest rates, because he wants stronger economic growth under his tenure. And his agitation and contempt for the Fed's reluctance to cut interest rates has only grown more intense and more public. The problem is that Trump is a Republican, and the GOP has a long history of preferring tighter monetary policy and higher rates, while essentially dismissing the Fed's counterbalancing obligation to maximize job growth. It's one of the several ways Trump is out of step with Republican orthodoxy.
But the president is also, shall we say, not exactly a details person. And it's pretty obvious that he spent the first part of his presidency farming out monetary policy and Fed appointments to some of the (relatively) more mainstream people in his cabinet. Only recently has the president apparently and belatedly realized this wasn't getting him the dovish approach he wanted, and he may have to actually pay attention to whom his White House nominates to the central bank.
A related problem for Trump is that the Fed's entire institutional culture — and really, the economics profession as a whole — has leaned towards monetary hawkery for several decades now. Finding people who are both doves and have the background and credentials of a traditional Fed pick isn't impossible. But it's not straightforward either.
Well, it turns out Waller's stint at the St. Louis Fed happened under that branch's president, James Bullard, whom Waller has worked closely with. Bullard stands out as a monetary dove, and even insisted the Fed should've cut rates already at its latest meeting in June. What we know of Waller's own paper trail on this topic isn't super deep yet. But he's written in defense of price level targeting as an approach to monetary policy. It's a somewhat complicated idea, but the upshot is that, if the economy has gone through a period where inflation has been stuck below the Fed's 2 percent target, then the central bank should be willing to let inflation rise above the target for a mirroring length of time to make up the lost ground.
Since inflation has been stuck below 2 percent for years, this is basically a recipe for deliberately trying to drive inflation to 3 or 4 percent for a few years to rebalance America's long-term growth trend. And the best way the Fed could do that is by loosening its monetary policy stance and cutting interest rates again. That's an idea the mainstream of U.S. economics and monetary policy thinking still treats with trepidation. But it's exactly the kind of approach Trump is looking for. (It's also the right approach on the merits, for what it's worth.) And in Waller, it's an approach that comes backed by a solid pedigree, and is drawn out of a framework of economic theory the mainstream is familiar with.
You could see Moore and Cain as Trump's first attempt to grab the controls of his own administration's Fed policy. And it failed because they were just obvious hacks. In fairness to Shelton, she definitely has the background Moore and Cain lacked, but her substantive views are equally bizarre, contradictory, and potentially destructive.
With Waller, on the other hand, Trump may have finally found his sweetspot.
