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Donald Trump’s attempt to appoint an ardent supporter and Federal Reserve Board sceptic to a seat on the board of the world’s most powerful central bank, snookering the incoming Biden administration in the process, is faltering.
On Tuesday (US time), Republicans weren’t able to secure sufficient votes in the Senate to confirm Judy Shelton’s nomination for a seat on the Fed’s board of governors.
Judy Shelton’s nomination was blocked by the Senate but could still be brought forward again.Credit:Bloomberg
That doesn’t completely rule her out – her nomination can be brought before the Senate again – but time is rapidly running out to install the controversial former Trump adviser to one of the two vacant seats on the board. The other is likely to be filled by the less controversial and well-credentialled Christopher Waller, an economist with the St Louis Fed.
Time is running out because, with three Republican senators already opposed to her candidacy and Democrat Mark Kelly, who won a special election in Arizona earlier this month, likely to join the Senate on November 30, the window for a majority in favour of her appointment is closing. The Republicans currently hold 53 of the 100 Senate seats, with Vice President Mike Pence having a casting vote in the event of a tie.
The fate of the vote on Shelton matters. The pandemic has underscored how central the Fed is to the US and global economies and financial systems. It was its unprecedented action in March which helped turn around the dive in markets, averted the threat of a financial crisis and helped blunt the economic impacts of the virus.
Indeed, for more than a decade – since the financial crisis – the Fed has underwritten the bull market in equities and solid economic growth in the US with its low interest rate structure and massive purchases of bonds and mortgages.
The Fed also plays the key role in bank regulation, which has been a major focus of the Democrats, particularly within the progressive left who would like to see the winding back of some of the modest deregulation that has occurred during the Trump years and a tougher approach more broadly.
If Shelton and Waller’s appointment were to be confirmed, Trump would have installed six of the seven current board members.
The one remaining Democrat-nominated governor, Lael Brainard, is being touted as a potential Biden Treasury Secretary. If she (or Janet Yellen, another name being canvassed) were to move into the new administration and the Republicans hold onto their Senate majority and remain true to form, Biden would face a difficult hurdle in successfully nominating a candidate of his own.
Shelton is a controversial nominee because she has espoused controversial and inconsistent views.
The politicisation of the Fed that Trump has sought throughout his term matters because central banks’ decision-making needs to be distanced from politics and the political cycle and to be framed for the long-term.Credit:Polaris
She has in the past questioned the need for the Fed to be independent of the political process and indeed for the existence of a central bank. She has described the Fed’s role in establishing monetary policies as akin to Gosplan, the former Soviet Union’s central planning committee.
Her advocacy for a return to the gold standard, however zany, is consistent with her views on the bank’s independence. That would tie monetary policy to the fluctuations in the gold price.
She’s also opposed to bank deposit insurance but perhaps the key objection to her appointment is the demonstrable influence politics and her relationship with Trump had on her views on monetary policy.
When the Obama administration was in power she criticised the Fed for not raising rates and for persisting with its quantitative easing programs, as did Trump. She warned of ruinous inflation and advocated a strong dollar policy, accusing the Fed of weakening the US dollar to boost exports.
After Trump was elected he, and she, switched to berating the Fed for not reducing rates and expanding its bond and mortgage purchases even as economic growth initially accelerated in response to Trump’s corporate tax cuts. They both called on the Fed to weaken the dollar to boost exports.
The lack of consistency in her views has been obviously partisan. Where Trump has gone she has followed. In an institution whose credibility is dependent on perceptions of its independence from politics that matters.
It could be argued that as one of seven board members, with five of the existing board including the chair, Jerome Powell, having demonstrated their independence from Trump via their actions (even when Trump was openly threatening to sack Powell) Shelton would have little influence if she were appointed.
She might be disruptive and distracting but powerless, particularly as the key monetary policy decisions are taken by the Fed’s larger Open Market Committee.
That’s true to a point but on some major decisions – like the massive emergency lending programs the Fed initiated in response to the pandemic – the support of five board members is required.
Federal Reserve board member Lael Brainard is being mentioned as a potential Treasury Secretary in the Biden administration.Credit:Bloomberg
If the normal turnover on the board were to occur during a Biden administration – and the appointment of Brainard as Treasury Secretary would mean only one more vacancy would need to arise – Shelton could conceivably hold a veto over those decisions.
Given the politicisation and destabilisation of the US bureaucracy during Trump’s term it perhaps isn’t surprising that the Republicans are continuing to push for the appointment of such an obviously unsuitable candidate for a seat on the Fed board.
It would fit with the larger approach of trying to deny Biden scope to implement his own agendas, or at least create some obstacles to his ability to reshape policy.
If the Republicans continue to hold onto their Senate majority – the run-offs for the two Georgian senate seats will decide that issue – they can frustrate the Democrat’s ability to install their own Fed nominees and potentially to tighten bank regulation. If they were to lose their hold on the Senate, of course, there would be a temptation for the Democrats to stack, not just the courts, but other institutions like the fed as well.
The politicisation of the Fed that Trump has sought throughout his term – he has tried, and failed, to appoint other partisans with unsavoury reputations and who were less qualified than Shelton – matters because central banks’ decision-making needs to be distanced from politics and the political cycle and to be framed for the long-term.
They might not always be successful but their motives need to be pure and their actions consistent and predictable if inflation, the price of money and the value of the currency are to be a stable as possible.
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