What Would the Addition of Judy Shelton Mean for the FOMC?
In a 13-12 vote Tuesday, the Senate Banking Committee approved Judy Shelton, a wildly controversial economist and long-time supporter of Donald Trump, to a seat on the Federal Reserve Board of Governors.
While the outcome of the vote came as little surprise to those inside the beltway (the president has been trying to get Dr. Shelton on the Board for some time now), what is surprising is how much her ideas depart from 21st Century economic thinking.
For instance, as recently as 2008, Dr. Shelton voiced support for the US reverting back to the Gold Standard, something nearly every economist thinks is ill-advised and unrealistic in practice. She flip-flopped on key policy positions once President Trump was elected, such as favoring lower interest rates, propping up financial markets, and limiting Fed independence. And ironically, some of her older research contends that the Federal Reserve is an unnecessary institution altogether.
These opinions, while typically voiced by ill-informed ideologues like Rand Paul or others who fail to grasp the intricacies of a global monetary system, are quite alarming when uttered by someone who has as much economics training as Dr. Shelton. Having said that, I don't think we should be as concerned about her joining the Fed as many in the media think we should because there is only so much influence one Federal Open Market Committee member can have on the outcome of American monetary policy.
The Federal Open Market Committee (FOMC) is comprised of 12 voting members: seven members of the Board of Governors of the Federal Reserve System, the president of the Federal Reserve Bank of New York, and four of the remaining eleven Reserve Bank presidents, all who serve one-year terms on a rotating basis. As a member of the Board of Governors, Dr. Shelton would have a permanent vote for the duration of her 14-year term, but given the size of the FOMC, there is only so much power she would actually wield. This isn’t to say she won’t have any impact on how policy is shaped by the FOMC, she certainly will. If confirmed by the Senate, Dr. Shelton will contribute to the regular debate and analysis of the Board. But the idea that she will somehow convince the other FOMC voting members, all of whom hold more modern views of monetary policy, to subscribe to her radical views is simply false. We aren’t going to abolish the Fed. We aren’t going back to the Gold Standard. And the confirmation of Dr. Shelton doesn’t mean the Fed will suddenly take orders from the White House. Policy, for the most part, will continue on the path shaped by Chairman Powell and Vice Chairs Clarida and Quarles.
So given this, why not add a little diversity to the Board? It's not the worst thing in the world. Who knows, maybe Shelton will provide a healthy dose of dissent to the group. I think it’s beneficial to have differing opinions at the Fed, and if you asked most Americans, they would probably agree. If voters favor a diverse Supreme Court, there’s no reason we shouldn’t have a diverse FOMC. Dissents may be irritating for committee leaders—in this case, Chairman Powell—but dissents limit the chance of groupthink taking hold of the committee. Make no mistake, I’m not saying she is the right person for the job. Judy Shelton is beyond unqualified for a position on the Federal Reserve Board. What I am saying is her presence won’t jeopardize how monetary policy is formed by the Board, and in fact, it could prove useful in building more robust policy prescriptions.
The addition of Judy Shelton is not the end of the Fed as we know it. The FOMC is simply too large. So, as her nomination goes before the full Senate, we should all breathe normally knowing that, no matter the outcome, Judy Shelton will in no way threaten the US Federal Reserve, or the American economy.