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Wall Street Journal: The war on Judy Shelton

Section: Daily Dispatches

From The Wall Street Journal
Thursday, February 13, 2020

Judy Shelton finally gets her day in the Senate on Thursday, and if anyone has a coherent argument for denying her confirmation to a seat on the Federal Reserve Board of Governors we haven't heard it. The caterwauling over her nomination confirms why her intellectual diversity is needed at the Fed.

Ms. Shelton, a long-time contributor to these pages, was bound to be controversial after a career challenging conventional monetary wisdom. Opposition to her nomination has congealed into two complaints. One is that Ms. Shelton has long supported a return to the gold standard. The other is that she has more recently abandoned that belief in monetary discipline for political reasons. Hey, no one said these critics are consistent. They're also not honest.

... Dispatch continues below ...


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Under floating exchange-rate regimes, "entrepreneurs in countries with overvalued currencies are unable to attract the foreign investment that should logically flow in their direction, while scam artists in countries with undervalued currencies lure global financial resources into brackish puddles," she wrote in our pages in 2008.

"The consequences of currency chaos affect the personal fortunes of millions of individual citizens; once unleashed, it can spawn social resentments and political upheavals that change the destiny of whole nations," she wrote in a separate piece for us in 2008. Careful study of eras in which economies backed their currencies with gold, as Ms. Shelton has conducted, offers insights into the truth of this assessment, and also revealing contrasts with the catastrophic misfires of our era of floating rates.

Her critics claim this is revolutionary, but the late Fed Chairman Paul Volcker also recognized the benefits of stable exchange rates. Former Fed Governor Wayne Angell followed a price rule that included commodity prices and, before and after his tenure as Fed chairman, Alan Greenspan praised gold as a sometimes useful price signal.

The second complaint is that Ms. Shelton demanded higher interest rates and less monetary accommodation when President Obama was in office. But she supposedly has abandoned those principles now so the Fed can keep the Trump economy rolling.

The inconvenient truth is that central bankers seem to have no clear idea these days about when they should raise or cut rates. Conventional wisdom dictates that they cut when economies are weak and raise when they're strong. But mounting evidence across the developed world after a decade (two, in Japan) suggests that sustaining low rates and quantitative easing beyond a crisis to goose growth is destructive.

Productivity suffers as zombie firms and bad investments proliferate and asset prices go haywire. Central bankers obsessed with the Phillips Curve trade-off between inflation and full employment can point to no rationale in their own theory for raising rates amid a strong economy if inflation still is on target.

Ms. Shelton was right to ask if the Fed should have stuck with low rates long after the immediate crisis of the financial panic and Great Recession had ended. More recently, Fed economists in December 2018 said a rate rise was necessary, only to quickly back off, without a clear theoretical basis for either decision.

Ms. Shelton calls the bluff on this by suggesting that if historically low unemployment and strong economic growth are not triggering rampant inflation, then perhaps the Fed should butt out for now. Especially if a consequence of a Fed rate hike would be to destabilize the exchange rate vis-a-vis other major central banks that remain staunchly dovish.

Markets agreed with her, going bonkers in the days after Fed Chairman Jerome Powell announced a rate hike and put an unwinding of quantitative-easing asset purchases on "autopilot" in December 2018. Investors recognized the Fed was operating on whim rather than any discernible economic logic, and their verdict was so brutal Mr. Powell had to reverse course a month later. Who was the crank then?

None of this is inconsistent with Ms. Shelton's long-argued views. The inconsistency and confusion rest with her critics and the prevailing monetary establishment, and are dangerous for the U.S. economy.

Ms. Shelton is clearly qualified for the Fed role. The question for Senators is how much they trust Mr. Powell, or the academics and journalists who are trying to tank her nomination. If Senators really think these people are brilliant theorists capable of guaranteeing economic growth and financial stability -- all evidence to the contrary—then go ahead and nix Ms. Shelton.

But the Fed is straying ever further into uncharted territory as it extends its low-rate regime and weighs whether or how to fully extricate itself from quantitative easing. If Senators harbor even a sliver of doubt over whether Ms. Shelton's critics know what they're doing, that's all the more reason to confirm her as a distinctive voice in such crucial debates.

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