Fed Nominee Shelton Draws Senate Republican Concerns

Vito J. Racanelli

As we pointed out here last week, some resistance is brewing to President Donald Trump’s recent nomination of economist Judy Shelton to the Federal Reserve’s board of governors.

Shelton, once U.S. envoy to the European Bank for Reconstruction and Development and an informal Trump advisor to his 2016 campaign, has pushed for returning to some kind of gold standard, a relatively unorthodox view among economists. Shelton appears to be somewhat lukewarm on Fed’s independence from the executive branch and defended Mr. Trump’s call for lower interest rates, reversing her years of calls for higher rates.

Despite being of the president’s party, two senior Republican senators expressed concerns in testimony last week in Senate banking committee testimony. According to press reports, this might cloud her prospects.

Senator Pat Toomey of Pennsylvania was critical of views that the dollar is too strong and that it is the job of the Fed to pursue devaluation, calling it a “dangerous path,” when questioning Shelton in the Senate Banking Committee.

Fellow Republican Richard Shelby of Alabama simply said he was “concerned,” according to the Wall Street Journal. Neither has indicated which way he will vote but it does suggest, as both are senior members of the committee, that their doubts could pose a setback for Shelton. Another Republican, John Kennedy, from Louisiana, told reporters he was undecided, after the testimony. As might be expected, the Democratic Party senators criticized her views.

Trump’s other nominee for the board, Christopher Waller, research director at the Fed’s Bank of St. Louis, didn’t gather the kind of opposition that Shelton has.

Waller is viewed as a conventional pick and his confirmation is likely to be smoother.

Separately, the Fed has begun to express broader concern that the coronavirus, which has markets perturbed, is casting uncertainty over the U.S. economy. There was no direct suggestion of an effect on interest rates. However, one Fed policymaker, Philadelphia Fed head Patrick Harker and a FOMC voter this year, told reporters last week that if the situation gets significantly worse and impacts the American economy then the Fed would have to think about an accommodation.

The NY Fed continues to add tens of billions of dollars in temporary liquidity to financial markets, through overnight repurchase agreements, or repo, and 14-day repo intervention.

The CME Fed futures market, historically a good indicator of rate trends, puts a 56% rate change probability (reduction) in July. The U.S. Treasury 10-yr note yield was around 1.59%, down from 1.60% last week.

Upcoming: 3/17-18 - FOMC meeting. No action expected.

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Vito J. Racanelli
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