Judy Shelton’s path to Fed narrows with third GOP dissenter

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A third Republican senator has come out against Judy Shelton, President Donald Trump’s controversial pick for the Federal Reserve Board of Governors, narrowing the path for Shelton, a onetime adherent of the gold standard, to join the central bank as a voting member.

Lamar Alexander of Tennessee issued a statement Monday confirming his opposition to Shelton, days after Senate Majority Leader Mitch McConnell, R-Ky., surprised observers when he announced plans to hold a floor vote on her confirmation this week during the lame-duck session of Congress.

Another moderate Republican senator, Lisa Murkowski of Alaska, said she would support Shelton’s nomination.

“The fact that she’s running into a little bit more resistance is reassuring,” said Kenneth Kuttner, an economics professor at Williams College. “She’s come out and essentially called into question the idea that the central bank should be fully independent. That’s definitely a minority view.”

Shelton also was known for her unorthodox support for the gold standard, an archaic policy concept to which no developed economies adhere today. Loosely, the gold standard mandated that every dollar in circulation be backed by gold or another precious metal, like silver. It was viewed as a mechanism against inflation, because the Fed would have limited policy tools to expand the money supply, provide market liquidity or backstop lending or credit markets.

Shelton’s nomination passed the Senate Banking Committee this year along party lines, with all 12 Democratic members in opposition.

“She has advocated for failed Great Depression-era policies — like a return to the gold standard and the removal of deposit insurance — that would make our economy more volatile,” those members wrote in a joint statement urging the committee chair to hold another hearing.

Shelton previously had been expected to be confirmed by the full Senate along a narrow, party-line vote after Republicans Mitt Romney of Utah and Susan Collins of Maine also expressed opposition. The path to confirmation narrowed with Alexander’s statement, but policy observers were quick to say it would be premature to count Shelton out.

“Even with a potential third Republican denying support for Shelton, there is still a significant probability of her confirmation,” said Lindsey Piegza, chief economist at Stifel.

Karen Shaw Petrou, a co-founder of Federal Financial Analytics, a financial policy consulting and analysis firm, said the other wild card is Sen. Rick Scott, R-Fla., who is in self-quarantine because of potential Covid-19 exposure this week and would be unable to participate in a floor vote.

“Sen. Alexander’s decision, combined with Sen. Scott’s quarantine, puts this contentious nomination back in limbo,” she said, raising the likelihood that confirmation would come down to a tiebreaker vote cast by Vice President Mike Pence.

That could be a risky political gamble for McConnell. “Ultimately, Sen. McConnell will need to decide how much he wants to press his colleagues to ‘pack’ the Fed for this nomination to advance,” Petrou said.

Piegza said the cracks in Shelton’s Republican support indicate “growing concern” about the potential politicization of monetary policymaking. “Her previous positions or connections to the White House, coupled with comments of reducing the independence of the Federal Reserve Board, have raised concerns for those who wish to maintain and respect the autonomy of the country’s central bank,” she said.

That worry cuts both ways: As much as Democrats might have feared having a pivotal central bank seat filled by someone perceived as eager to bend policy to Trump’s whims, there is unease among Republicans that an overly malleable Fed could abandon its dual mandate of promoting full employment and inflation stability.

Alexander alluded to the fear in his statement, saying, “I don’t want to turn over management of the money supply to a Congress and a president who can’t balance the federal budget.” Alexander added that he was “not convinced” that Shelton’s commitment to Fed independence was as rigorous as it should be for someone in such a pivotal position.

Countries with politically aligned central banks often have to contend with higher inflation or politically sensitive business cycles that disrupt business and are detrimental to steady economic growth, Kuttner said. “Other central banks’ experience in the past with less than full independence have typically not produced very good outcomes,” he said.

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