Judy Shelton, U.S. executive director for the European Bank for Reconstruction and Development, speaks during an interview in Washington, D.C., May 29, 2019.
Andrew Harrer | Bloomberg | Getty Images
President Donald Trump’s intention to nominate economist Judy Shelton to the Federal Reserve comes with two pressing questions — whether she could be a future chair at the central bank, and if she even will be able to serve if confirmed.
The first is largely a political question and would only come into play if Trump continues to be dissatisfied with Chairman Jerome Powell and chooses not to renominate him when his term expires in 2022.
The second, though, is a sticky legal question and centers around a provision in the Federal Reserve Act that prohibits two governors from the same district. Governor Lael Brainard hails from the same Richmond region, though it’s not clear that there wouldn’t be a way around the rule.
In an announcement Wednesday, the White House said Trump plans on sending Shelton’s name to the Senate, along with that of fellow economist Christopher Waller of Missouri, whose nomination is expected to face few obstacles.
“Legally, it’s absolutely correct that there is a stipulation that calls for the appointment of representatives from each of the districts and not having any two from the same district. So far, that looks like it poses a great constraint,” said George Selgin, director of the Cato Center for Monetary and Financial Alternatives, a libertarian think tank. “But in practice, for all kinds of reasons it hasn’t been a binding constraint.”
Selgin pointed specifically to former governors Elizabeth Duke (2008-12) and Sarah Raskin (2010-14), both of whom also were from the Richmond district, which encompasses Washington, D.C.
A Fed spokesman referred the issue to the White House, which declined comment. Shelton did not respond to a request for comment.
The Federal Reserve Act states that “In selecting the members of the Board, not more than one of whom shall be selected from any one Federal Reserve district, the President shall have due regard to a fair representation of the financial, agricultural, industrial, and commercial interests, and geographical divisions of the country.”
‘A perfect fit’ who faces headwinds
One strategy that could be employed is if Shelton had a residence elsewhere. A White House release Wednesday stated that she is from Virginia, though she could be named to represent another district.
On the political issue, speculation has been growing that Shelton would be a strong contender for the chair position should Trump not renominate Powell. The president has been a fierce critic of Powell for the chairman’s lead in raising interest rates four times in 2018 and for rolling back the trillions of dollars in asset purchases instituted by his predecessors.
Shelton’s record on interest rates is somewhat complicated — she has criticized both the near-zero rates instituted during and for several years after the financial crisis, and the more recent moves to raise rates. Trump has pushed the Fed to cut rates and even urged the central bank to look at the negative rates pervasive in parts of Europe.
Shelton also has spoken in favor of returning to the gold standard that backs the issuance of U.S. dollars, and opposes the practice of paying interest on reserves that banks store at the Fed.
Cowen analyst Jaret Steinberg said there are enough flash points to keep her from being seated.
“Shelton would be a perfect fit as she would be a Trump loyalist who won Senate confirmation,” Steinberg said in a note. “We suspect there are enough Republicans who question her views on the gold standard and on excess reserves to put her confirmation in real doubt. To us, the Senate is unlikely to reject her nomination. The most likely outcome is that it just never votes to confirm her.”
However, the prospect of shutting down Trump nominees comes at a ticklish time for the Senate.
The president’s impeachment trial is beginning, and a move to scuttle Shelton’s move to the Fed could be seen as obstructionist, a profile the Senate may not want with the presidential election less than nine months away.
“Her views are a little exotic, but I think she’s got a pretty good chance of making it,” said Greg Valliere, chief global strategist at ABF and a veteran authority on Washington’s impact on Wall Street. “I don’t think if Trump hinted that she would be next in line for the chairmanship that it would be concerning for the markets.”
Larry Kudlow, chairman of the National Economic Council, told reporters on Friday that Shelton is likely to be confirmed and would be “a good addition to the board.”
As for the chairmanship, though, Cato’s Selgin said that’s not so assured given Trump’s “mercurial” nature.
“Certainly it depends on what positions she takes on different policies during her time on the board,” he said. “But it also depends on what Trump had for breakfast that morning.”