Economist Judy Shelton looks set to be appointed to the board of the Federal Reserve this week, despite strong objections from many mainstream economists.  An adherent of unconventional economic views, including erstwhile support for the gold standard, Ms Shelton’s forthcoming appointment can be seen either as a final act of Trumpian sabotage on the Biden administration, or as a much needed injection of common sense into an increasingly extreme era of Central Bank activism.

Trump lost the election.  He’s leaving office in January.  But Republicans are still hellbent on installing his disaster of a Fed nominee Judy Shelton.

Elizabeth Warren, US Senator (D – Mass), November 12th (via Twitter)

Ms Shelton has a decades-long record of writings and statements that call into question her fitness for a spot on the Fed’s Board of Governors.  She has advocated for a return to the gold standard; she has questioned the need for federal deposit insurance; she has even questioned the need for a central bank at all.

Letter to US Senators from 130 economists, August 2020

Judy Shelton in the Federal Reserve is excellent news.  A brilliant professional and an excellent choice.

Daniel Lacalle, Economist, Author, and Fund Manager, November 14th (via Twitter)

We make America great again by making America’s money great again

Judy Shelton, Economist and Author, 2019

Amy Coney Barrett’s recent US Supreme Court confirmation was divisive.  The Trump judicial appointment, known for her conservative views on hot button issues like abortion, gun control and climate legislation, was met with strong opposition from the Democrats.  Kamala Harris called her confirmation “a disgrace, not only because of what she will do when she gets on the bench, but because of the entire process.” 

While financial markets typically do not pay much attention to the US Supreme Court, they do pay a lot of attention to the Federal Reserve.  As such, it is surprising that Trump’s most recent (and potentially final) significant political appointment has not received more focus.  Judy Shelton’s nomination to the Federal Reserve board is just as contentious as that of Ms Coney Barrett, and the potential implications for FX markets, particularly the US dollar, are worth exploring.

Why is Judy Shelton’s nomination so controversial?

Much of the opposition to Shelton derives from her views on money.  Shelton recently called for a ‘new Bretton Woods conference’ to discuss a possible return of the US dollar to a gold standard.  The gold standard was abolished by President Nixon in 1971, and is considered anathema to most mainstream economists, who believe such a system would be brutally constricting for the economy, resulting in deep and prolonged recessions. 

Shelton also has little time for floating exchange rates, writing that “the experiment with floating rates since the end of Bretton Woods has brought about (economist Milton) Friedman’s worst nightmare: It has empowered central banks – particularly the Federal Reserve – and strengthened government control over the private sector.”  Shelton believes that money “must be immune from the machinations of governments and central banks” and claims that it “has become an insidious instrument of government policy.”

In short, Shelton is an advocate for ‘stable money’, and is profoundly opposed to government / state interference in market mechanisms (think quantitative easing and negative interest rates).  In an interview last year with the Financial Times, she questioned the Fed’s ability to set interest rates at all, asking “how can a dozen people meeting eight times a year decide what the cost of capital should be?  The Fed is not omniscient.  They don’t know what the right rate should be.”

What would Shelton mean for the US dollar?

While Shelton seems to favour a return to the fixed exchange rates of the pre-1971 monetary order (where currencies were pegged to the US dollar, which in turn was pegged to gold) this is not likely any time soon.  Shelton would be only one of 12 Fed board members, and it is clear that such a radical transformation of the global monetary system would require more than a single Fed appointment, no matter how radical they might be. 

In fact, Shelton’s recent proposals seem to acknowledge this.  Rather than explicitly calling for a return to the gold standard per se, she has instead floated the idea of ‘Treasury Trust Bonds’, in effect backing US government debt with gold.

By itself, Shelton’s appointment would not have a big impact on Fed policy in the short term.  However, it seems clear that she would oppose any move by the Fed to venture further down the path of extreme monetary policy activism, such as an expansion of quantitative easing, or the introduction of negative interest rates.  As such, her appointment is more likely to be associated with a stronger US dollar, although her direct ability to influence policy would be minimal. 

Perhaps more importantly, the confirmation of Judy Shelton by the US Senate would represent a shot across the bow of the international financial establishment, warning that current trends in monetary and fiscal policy are not tenable.  The World Economic Forum recently called for “The Great Reset”, referring to the need to reform capitalism post-COVID to reflect broader societal objectives such as equality and sustainability.  Could it be that we are approaching a ‘Great Reset’ of the post-Bretton Woods global monetary order?

Author: Kevin Lester