During the 2008 global financial crisis,Shelton criticised the Fed and questioned whether interest rates should be fixed by a central committee. “We might as well resurrect Gosplan,the old Soviet State Planning Committee,and ask them to draw up the next five-year plan,” she said.
She has in the past blamed government intervention in mortgage markets rather than the reckless activities of banks for the financial crisis.
She is also,or rather was,a passionate and long-standing advocate for a return of the US,and other countries,to the gold standard abandoned by Richard Nixon in the 1970s.
In effect,that’s another attack on the Fed’s existence and its mandate of maintaining stable prices and maximum employment,although more recently Shelton has – as has Trump - been as aggressive a proponent of Fed intervention to pump the US economy as she,and he before he became president,were once fierce critics of its efforts to do just that.
Only in Trump’s America could such peculiar candidates for a position on the board of the most powerful and influential central bank in the world be even contemplated.
In line to replace Powell?
If successful,Shelton is also being touted as a potential chair of the Fed if Trump is re-elected,replacing current chairman Jerome Powell whose term is scheduled to expire in early 2022.
Trump has recently been praising Powell for lowering US rates to essentially zero and pumping unprecedented levels of liquidity and credit into the US economy.
However,before the pandemic and while the US economy was growing strongly and the sharemarket was reaching record levels,he was a fierce critic of the Powell and Fed for not doing more to fuel economic growth and power the stock market that Trump uses as a guideline for evaluating his success.
Through 2018 and 2019 Trump even canvassed,occasionally publicly,the legally-dubious option of firing or demoting Powell.
While Trump’s nominations have been screened by the Senate to block out the ones with the most obviously poor credentials,Shelton’s fate appears line-ball.
The 12 Democrat members of the Senate Banking Committee are opposed to the nomination so far,but the 13 Republicans,despite some initial reservations,appear to be falling into line behind the administration. It would take only one Republican senator to defect to kill the nomination at the committee level,but four if it reaches the full Senate and the Democrats vote as a bloc.
The nominations matter. If successful,Shelton,who would take former chairman Janet Yellen’s seat,would be in place on the Fed’s board until 2024 and Waller would hold his seat until 2026.
While they and the other more conventional Trump appointees would fill six of the seven board seats (the other is held by Obama appointee,Lael Brainard),they still wouldn’t control the Fed’s 12-member Open Market Committee,which actually sets rates and the Fed’s monetary policies.
Spiking the punch bowl
The perception,however,that the Fed has been politicised,with members appointed for their political connections rather than their qualifications and its independence from government compromised,would matter.
The Fed’s critical role in the US economy and that of independent central banks elsewhere,like our Reserve Bank,is not to be popular or kow tow to the wishes or re-election ambitions of the government of the day,but to try to maintain the optimal levels of long-term stable growth.
That can entail doing quite unpopular things;actions that might actually damage the re-election prospects of the government of the day.
Loading
Confidence in the independence of central banks and in the predictability of their policies is an important influence on the functioning of markets and on the investment decisions businesses make.
Whether they are successful,or not,the central banks’ actions need to appear distanced from the political cycle and made in the best long term interests of their communities.
As former long-serving Fed governor Bill Martin once said,the job of the Fed and its peers is"to take away the punch bowl just as the party gets going".
If the recent views of Shelton are indeed now her conviction,she (and Trump) would be more inclined to spike the punch even after the party had already heated up.