Judy Shelton, U.S. executive director for the European Bank for Reconstruction and Development, speaks during an interview in Washington, D.C., U.S., on Wednesday, May 29, 2019. Shelton, a conservative economist whom the Trump administration is considering for a vacancy on the Federal Reserve, said the central bank should avoid restraining growth while the U.S. is engaged in a trade war with China. Photographer: Andrew Harrer/Bloomberg
Judy Shelton: 'The Fed is not omniscient'. © Bloomberg

Judy Shelton, a senior US official who is being vetted for a job on the board of the Federal Reserve, has attacked the central bank for wielding undemocratic, Soviet-style powers over markets and suggested it should not even be in the business of setting interest rates.

In an interview with the Financial Times at the Trump International Hotel in Washington this week, Ms Shelton called on the Fed to “think about whether they are doing more harm than good”. If appointed to the board, she would be “asking tough questions” about its most basic mission, she said. 

“How can a dozen, slightly less than a dozen, people meeting eight times a year, decide what the cost of capital should be versus some kind of organically, market supply determined rate? The Fed is not omniscient. They don’t know what the right rate should be. How could anyone?” Ms Shelton said.

“If the success of capitalism depends on someone being smart enough to know what the rate should be on everything . . . we’re doomed. We might as well resurrect Gosplan,” she said, referring to the state committee that ran the Soviet Union’s planned economy. Ms Shelton did postdoctoral research on the Soviet economy at Stanford University’s Hoover Institution, and was designated to be the Russia expert on the board of the National Endowment for Democracy.

The US representative on the board of the European Bank for Reconstruction and Development, Ms Shelton is being considered by Donald Trump to be a Fed governor after his previous proposed candidates — Stephen Moore and Herman Cain — were dropped from contention. Both Mr Moore and Mr Cain withdrew this year after Republicans in the upper chamber balked at their limited qualifications for the job, personal factors that emerged during their vetting, and fears that they would not be independent enough from Mr Trump. 

Ms Shelton, who obtained an MBA in business administration from the University of Utah, has already passed muster with Congress for the EBRD job, which could make it harder for the Senate to turn her down. But her possible nomination suggests that Mr Trump is in no mood for a less controversial pick for the US central bank, and wants a disruptive candidate to argue for unorthodox policies within the Fed. 

Judy Shelton
Judy Shelton at the Trump International Hotel in Washington: 'The Fed is not omniscient. They don’t know what the right rate should be.' © James Politi

As well as questioning whether the Fed should even be steering monetary policy, Ms Shelton has called for the central bank to stop paying banks interest on excess reserves, a policy introduced during the financial crisis, saying it was turning financial institutions into “utilities”, rewarding them for allowing money to “sit doing zilch” rather than being loaned out.

She also said that the Fed should continue to reduce its balance sheet below the $3.5tn target set by Jay Powell, the chairman. “I would rather the Fed be less of an entity. When a central bank buys up government debt, that’s the beginning of compromised finances.”

She also said the Fed had become so influential that it unnaturally drove investment decisions and affected financial markets. “It’s the distorting aspect of the Fed that is the worst aspect — it’s a wag-the-dog situation. People are fixated on the Fed and are making money by arbitraging, trillions of a second after the latest FOMC announcement,” she added. 

Ms Shelton has long been sympathetic to the gold standard, which the US fully abandoned in the early 1970s in favour of a flexible exchange rate for the dollar. “People call me a goldbug, and I think, well, what does that make them? A Fed bug,” she says. Her big dream is a new Bretton Woods-style conference — “if it takes place at Mar-a-Lago that would be great” — to reset the international monetary system, replacing the current regime, mostly based on floating currencies. Ms Shelton said countries should agree to tie their currencies to a “neutral reference point, a benchmark” — which she envisages to be a “convertible gold-backed bond”. 

“Now is the pivotal moment to question whether central banking is really delivering what the central bankers themselves aspire to. They are going through self-examination so I think it’s reasonable to say there are alternatives,” she said. 

Ms Shelton, who has close ties to Larry Kudlow, the director of the National Economic Council, as well as David Malpass, the president of the World Bank, worked for Mr Trump as an economic adviser during the 2016 presidential campaign. She endorsed his “pro-growth economic agenda”, from tax cuts to deregulation.

She also supports the US president’s trade war with China, including the decision to ratchet up tariffs after turning away from a deal at the eleventh hour. “I think it took a lot of guts to say that [the deal offered by China in early May] will mean everything we were fighting for was just a joke,” Ms Shelton said.

“Thank goodness he is sticking it out, I’ve always thought we had to fight fire with fire with China, Europe’s talked about it for ages and never really did anything with teeth in it, and neither did the US until now.”

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