President Trump is hoping the third time will be the charm as he tries to fill the two vacant seats on the Federal Reserve Board. He says he will nominate Judy Shelton and Christopher Waller to join the five sitting members and finally fill out the board.
You will recall that a few months ago Trump floated Steve Moore and Herman Cain as possible nominees for these seats, though he never formally sent their names to the Senate, possibly out of a desire to hear less laughter. If you don’t follow the Fed closely, you may not recall that Trump made a prior attempt to fill the seats: He nominated the economists Marvin Goodfriend and Nellie Liang in 2017 and 2018, respectively, but the Republican-controlled Senate would not confirm either of them.
One observation you could make about this process is that the Fed has been without a full complement of members for quite a while and seems to be nonetheless performing its functions adequately. In fact, the last time all seven Fed board seats were filled was in 2012.
Filling all the seats is a best practice, but in a pinch — for example, in a situation where a president who appears bent on undermining the Fed’s political independence is desirous of Fed appointees who would help him do that — putting nobody in the open seats may be the best option, and it is the option the Senate has chosen repeatedly, though with a variety of implicit justifications.
Moore and Cain were bizarre, unqualified choices whose views on monetary policy appeared to be suspiciously driven by their political links to the president. Both also had significant personal issues. Goodfriend and Liang were much more conventionally qualified economists, but Goodfriend had heterodox views on monetary policy that made it possible to object to him from the right or the left, and Rand Paul teamed up with Democrats to sink his nomination; Liang, who had been a staffer at the bank for decades and was strongly backed by Chairman Jerome Powell, held views on bank regulation that Republicans objected to.
As the Washington Post notes in a staff editorial, Waller seems like a fine enough choice. He has dovish views on interest rates, but he comes by those views honestly, with a clear academic basis. His outlook on monetary policy is not new with this new president. The problem is Shelton, who like Cain and Moore before her has traded in a long track record of hawkish gold-buggery for a new, dovish outlook that calls for the low interest rates President Trump wants.
In 2015, she said low interest rates were “making suckers out of savers.” Now, even though the economy has gotten stronger and the argument for low rates should have, if anything, gotten a little bit weaker, Shelton is suddenly an advocate of cutting interest rates to zero, in order to increase access to capital.
Shelton’s flip-flop is, if anything, more egregious than Moore’s and Cain’s, because monetary policy is supposed to be an actual area of expertise for her. Moore could claim — embarrassingly but plausibly — to have been a monetary policy tourist who didn’t know what he was talking about when he said hawkish things in the past. It’s hard to square the wild swings in Shelton’s views with the idea that she is an expert, especially since she is still out there saying she favors an inflation target of zero, even as she calls for rate cuts that should tend to push inflation upward.
As Bloomberg’s Ramesh Ponnuru notes, confirming her to the Fed board would be a gamble, because we don’t know which Shelton would show up to work. Would she turn back to hard money advocacy, having gotten the board seat she wanted out of a dovish and gullible president? Or would she do whatever Trump wants, in hopes of being named Fed chairman in 2021?
Just after Trump has made these picks, Art Laffer, to whom the president just awarded the Presidential Medal of Freedom, has been attacking the very concept of Federal Reserve independence, saying the Fed should be directly controlled by elected officials, like the military is. And the president has been declaring — dubiously — that he already has the legal authority to demote the Fed chair if he feels like it.
Historically, Fed independence has been a bigger concern for conservatives than for liberals, because conservatives have felt they had more to fear from a politicized Fed that might prioritize short-run economic performance and temporarily low unemployment over the long-run economic costs of unexpected inflation. So it is kind of funny that it is a Republican president and conservative economic pundits like Laffer and Moore who are urging politicization of the Fed so rates can be lower. But conservatives in the Senate have reasons to take a long view and consider how they might like it in the long run if the Fed becomes more politically accountable to future presidents.
The best tool they have to protect the Fed from Trump is the one they have been using: Their authority to refuse to confirm his nominees, so he is not tempted, for example, to try to demote Powell from the chairmanship and give it to Shelton or even Weller. The Fed Board can work just fine with only five members. So long as Trump is the person making nominations, there’s no reason to aim for seven.