Which Judy Shelton Would Show Up at the Fed?

(Bloomberg Opinion) -- Judy Shelton, the economic adviser President Trump says he is nominating to the Federal Reserve Board, has long been a predictable voice in monetary policy debates. Predictability is often a good thing in that context: It beats being erratic. Many monetary policy specialists want central banks to minimize the possibility of surprises by announcing relatively simple rules they will follow.

Until very recently, Shelton has been a consistent voice for tight money. In 2010, she decried the idea that the Fed would strive for 2%  annual inflation. That was much too high. It meant that “over and above all the taxes you pay … you will also give up another 18 percent of what you've earned and saved” over a decade, as inflation eats away at the value of your dollars. “An egregious violation of your property rights,” she called it. The next year, she said that any inflation, even at a rate as low as 2 percent a year, is “highly immoral.”

She kept sounding the same notes for years afterward. Quantitative easing was a mistake; the U.S. should lead the way to a new international gold standard; the Fed should stop setting “ultralow interest rates.”

But she is sounding very different now that she has a chance to be the nominee of a president who favors lower interest rates and isn't worried about inflation. She told the Washington Post last month that she would lower interest rates “as expeditiously as possible,” just as Trump wants. Her concerns about the debasement of the currency and the violation of property rights brought about by loose money are evidently a thing of the past. The price of gold has been rising for much of the last year, which the Shelton of yesteryear would have seen as a sign that monetary policy needs to tighten. The Shelton of today doesn't.

This might seem promising: Her old views were worth discarding. In 2010, inflation was at one of its lowest levels in decades. Attempting to drive it down even further would have increased unemployment at a time it was already nearly 10%. It would also be extremely unusual for anyone to suffer the ten-year losses she discussed from a 2% inflation rate, since nominal wages, interest rates and asset values all rise when the price level does. Tying the dollar to gold, meanwhile, would put swings in the global demand for the metal above the needs of the U.S. economy in setting monetary policy.

But Shelton has not rejected her views because they were wrong. Her explanation for why she now favors cutting interest rates is that the economic landscape has supposedly changed. “When you have an economy primed to grow because of reduced taxes, less regulation, dynamic energy and trade reforms, you want to ensure maximum access to capital,” she told the Wall Street Journal.

This argument is exactly backwards. If Trump's policies have increased productivity, as Shelton claims, it's a reason to raise rather than to lower interest rates. In an economy that is limping along with a trend growth rate of 2% a year, low rates might temporarily produce faster growth. If the Trump administration has achieved its goal of raising the trend growth rate to 3%, we will have faster growth without that boost.

Shelton's prescription for monetary policy has changed so dramatically, and her rationale for it makes so little sense, as to make her appointment to the Fed a gamble. Does she believe what she is now saying, or is she just saying what Trump wants to hear? If the latter, then at the Fed would she revert to the rigid opposition to inflation at any cost that has marked most of her career? Or stick with whatever Trump wants?

The Journal interviewer began his write-up by saying, “These are dizzy days for monetary economists.” For people keeping track of Shelton's pronouncements, they're even dizzier.

To contact the editor responsible for this story: Tobin Harshaw at tharshaw@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ramesh Ponnuru is a Bloomberg Opinion columnist. He is a senior editor at National Review, visiting fellow at the American Enterprise Institute and contributor to CBS News.

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