The Washington PostDemocracy Dies in Darkness

Trump’s potential Fed pick Judy Shelton wants to see lower rates ‘as expeditiously as possible’

Judy Shelton, U.S. executive director for the European Bank for Reconstruction and Development, after a meeting in Washington on May 29. (Andrew Harrer/Bloomberg News)

President Trump wants the Federal Reserve to cut interest rates and he’s looking to fill the remaining two spots on the central bank’s board with people who agree with his views.

Conservative scholar Judy Shelton is the latest potential Fed candidate to catch the Trump team’s eye.

The Federal Reserve decided against cutting interest rates Wednesday, but signaled they may take such action soon.

However, that may not be fast enough for Trump. On Tuesday, Trump held out the possibility of attempting to remove the central bank chair if the Fed doesn’t cut rates, a legally questionable step that has never been done before in the United States.

The president is also looking to fill the two spots on the Fed’s governing board with people who share his views on reducing interest rates.

Shelton has discussed a potential role on the Fed board with the White House and has begun the paperwork, she said, but she has not been formally nominated or mentioned by Trump. The president’s preferred picks, businessman Herman Cain and ally Stephen Moore, had so little support among Senate Republicans that they withdrew from consideration.

Shelton was an economic adviser to Trump’s 2016 campaign, holds a PhD in business administration from the University of Utah and says she would like to see the Fed cut rates steeply -- possibly to zero.

“I would lower rates as fast, as efficiently, as expeditiously as possible,” Shelton said in an interview this week in the lobby of Trump International Hotel in Washington.

On eve of critical Fed meeting, Trump suggests he might remove Chair Jerome H. Powell

Trump argues that low interest rates would trigger faster growth and says he doesn’t understand why the Fed is worried about inflation when it has been modest for years and shows no sign of spiking. Shelton agrees with Trump that it’s a mistake for the Fed to tap the brakes on the economy right now.

“The goal is still job creation even though it’s low employment,” she said, adding that she supports Trump’s economic agenda of lower taxes, less regulation and a battle with China over trade.

Shelton’s main reason for wanting to reduce interest rates is more technical than Trump’s. She believes the Fed should stop paying interest on the “excess reserves” that banks like JPMorgan Chase and Bank of America hold at the Fed. This practice started during the financial crisis and has become the main way that the Fed now affects the economy, but Shelton thinks it’s time to end it.

“Because I’m so against paying interest on excess reserves, in a way, I’m radically in favor of eliminating 235 basis points [on interest rates],” Shelton said. She suggested a “glide path” of “maybe one to two years” to take the interest rate the Fed pays on excess reserves from the current level of 2.35 percent back down to zero.

Companies in furious bid to prevent new China tariffs as summit looms

She is clear that she would like to see interest on excess reserves go to zero, and she suggested that the Fed’s main benchmark interest rate could also be reduced substantially without doing any harm to the economy.

“Let’s say they do bring it down 100 basis points in the next six months. Do you think that will cause inflation to go up?” Shelton said. “I don’t know the answer to that anymore.”

Shelton is soft-spoken and perceived by many in Washington as less combative than Trump’s last two intended Fed nominees, Moore and Cain. She has already been confirmed by the Senate to be the U.S. executive director for the European Bank for Reconstruction and Development, which might make it easier for her to win Senate approval to be a Fed governor.

But her beliefs about the Fed are outside the mainstream. She has long preached that the United States needs “sound money” and should consider returning to the gold standard. She has gone as far as to call for global leaders to meet at Trump’s Mar-a-Lago resort to hammer out a new monetary system so countries like China can’t manipulate their currencies.

Trump’s “a disrupter and we need a disruptive voice on the Fed as well,” Shelton said in a November 2017 interview.

Her critics say she wants to blow up the Fed and would be Trump’s lackey, but she says she hasn’t spoken with the president and that her views on central banking have been public for years and haven’t changed. She says she communicates with Treasury Secretary Steven Mnuchin and National Economic Council director Larry Kudlow, who has been a longtime friend and is leading the search for Fed nominees.

“I believe in transparency at the Fed. So I believe you might as well know what I think, because I wouldn’t change,” she said. “I don’t talk to the president.”

In the interview with The Washington Post, she called herself a “populist” and a “nationalist” and questioned whether the nation even needs the Fed, although she clarified that her main goal is to get the Fed to change its ways, not to abolish it.

She acknowledged that if she’s nominated and confirmed for a Fed role, she would be one of 12 members on the central bank’s policy setting committee and that there’s only so much she could affect on her own.

“What could one person do? I don’t know,” she said. “I would just say my first battle I would pick would be paying interest on excess reserves.”

For years banks operating in the United States have been required to keep some money — known as required reserves — deposited at the Fed to ensure they have enough cash on hand to pay customers. But during the financial crisis, the Fed began incentivizing banks to keep extra money — known as excess reserves — at the Fed by paying banks interest on those extra reserves above the mandated limit.

The excess reserves held at the Fed provided an additional cushion, similar to a rainy-day fund, to ensure that the U.S. banking system had enough money to function. But it also had the side effect of becoming the main tool the Fed now has to affect the economy. When the Fed raises interest rates, banks typically want to keep more excess reserves parked at the central bank. And when the Fed lowers rates, banks typically want to take some of the excess reserves they were holding at the Fed and lend them to homeowners and small businesses.

Current Fed leaders believe this excess reserve system works well and gives them even more ability to fine tune the economy, but Shelton, who rose to prominence in the 1980s for her prediction that the Soviet Union would collapse, views what the Fed is doing as too much government meddling in the banking system.

“This is like universal income for banks. They get paid to do nothing,” said Shelton, who pointed out that banks earn 2.35 percent interest from the Fed on their reserves while most American savers are getting 0.1 percent. “I think that’s just so demoralizing to the whole idea of capitalism.”


Trump may be about to face his biggest test yet on the economy

The fate of Trump’s economy now hinges on the Federal Reserve, the agency the president called ‘crazy’

There are three ways the U.S.-China trade war could end. Two would be bad for America.