Trump’s Fed nominee assures she won’t take America on ‘a very, very dangerous path:’ Sen. Toomey

Update Feb. 27: Sen. Toomey says he’s ready to vote Yes: “Since the hearing, I have corresponded and spoken further with Dr. Judy Shelton about her views on monetary policy. She clarified to me that she will oppose using monetary policy for the purpose of devaluing the dollar. It would have been imprudent and contrary to statutory authorization for the Federal Reserve to go down this path. Given her assurances, I intend to support Dr. Shelton’s nomination.”

Feb. 14: Some of the Republican senators who rallied to President Donald Trump in his historic impeachment trial weeks ago reminded the White House on Thursday that their votes can’t always be taken for granted, at least when it comes to adding members to the nation’s top economic policy-making panel, the Federal Reserve Board.

The Senate banking committee held a hearing Thursday morning on two Trump-backed candidates, Fed economist Christopher Waller and political activist-turned-Trump adviser Judy Shelton. The selection is especially important because it would ensure a GOP Fed majority well into the next presidential term, writes Brian Gardner, political analyst in the Washington office of the Wall Street investment bank Keefe, Bruyette & Woods, in a note to clients.

“Republicans only have a one-vote margin on the Banking Committee,” so a nominee like Shelton, opposed by Democrats, “cannot afford to lose a single Republican vote,” Gardner said later in an email.

Sens. Pat Toomey (R., Pa.) and Richard Shelby (R., Ala.) “were the most skeptical Republicans of the ones who attended the hearing and asked questions” of Shelton, Gardner added. The Wall Street Journal later reported that Sen. John Kennedy (R., La.) was also undecided after aggressively questioning Shelton about what she would do to fight a recession.

Trump has leaned on Fed members to cut interest rates. Cheap money helps the U.S. Treasury slow the cost of interest on the national debt, as it struggles to finance President Trump’s record budget deficits. Low rates also encourage more Americans to borrow money, in hopes of keeping the economic expansion of the last 10 years going.

Cheap money from the Fed has reduced business borrowing costs but has had only mixed results for U.S. consumers: Home mortgage loan rates are near historic lows, but auto loan rates are rising, and credit card rates are higher than at any time since before the last recession, as individual Americans borrow faster than their wages rise, according to Federal Reserve data.

Trump nominee Waller, a former Notre Dame University professor who heads the economic research staff at the Federal Reserve Bank of St. Louis, provoked little concern from Democrats or Republicans on the committee. “Sounds like a shoo-in,” commented Guy LeBas, fixed-income chief at Janney Montgomery Scott, the Philadelphia investment bank.

Fellow Trump nominee Shelton, by contrast, is no unanimous choice. She has supported what mainstream economists consider a quixotic return to the gold standard as a base for the dollar, while her shifting positions on low interest rates, import tariffs, and “open borders” immigration were questioned by members of both parties.

While Democrats including Ohio Sen. Sherrod Brown criticized her affinity for gold and her changed positions, Republican Toomey challenged Shelton from business and conservative angles.

“You believe the Fed should actively seek to devalue our currency, if other countries are doing that, and I think that’s a very, very dangerous path to go down,” Toomey said. “Beggar-thy-neighbor mutual currency valuation is not in our interest. And it’s not in the mandate of the Fed to pursue it. I don’t think it’s achievable.”

Shelton defended her unorthodoxy by arguing that the Fed should include “intellectual diversity,” LeBas wrote, before adding his own view: “Her type of diversity -- marked most clearly by an inconsistent and seemingly random economic framework -- isn’t a good thing.”

Shelby said the gold standard was worth looking at from a historical perspective but added that the Fed “must look to the future."

He had said he hoped to support Shelton, while Toomey has called himself undecided.

Toomey is on record supporting Fed independence from “political pressure,” while Shelton has, since Trump’s election, written approvingly of the Fed coordinating its actions with both the president and Congress -- historically a left-wing position held by populists who believe the central bank should be accountable to the people, or at least their elected representatives.

Bankers and economic conservatives tend to prize the Fed’s independence, arguing that politicians prefer to artificially cut rates and inflate the economy when seeking reelection -- risking recession as private and public debt balloons.

Trump in 2018 replaced Fed Chair Janet Yellen with Jay Powell. Yellen raised interest rates from historic lows. Powell cut interest rates -- though not as much as Trump has demanded.

Trump has said he favors dropping interest rates below zero, so savers would end up paying banks to hold their money.

Two earlier Trump Fed nominees with atypical backgrounds, economics commentator Stephen Moore, who preceded Toomey as a president of the conservative Club for Growth, and Herman Cain, former chief executive of Godfather’s Pizza, both withdrew from consideration after bipartisan criticism.