Trump’s controversial Fed nominee tells it like it is - and Congress doesn’t like it

Some economic lessons are just hard to learn.

This month the Trump administration sent two nominees for the Federal Reserve Board of Governors to the Senate for confirmation. Only one is expected to be confirmed. The other appears to be too controversial, perhaps because of what she has to teach us.

The Fed was created in 1913 to serve only as a “lender-of-last-resort” when banks were in trouble. Congress quickly gave the institution more power, placing it over the monetary policy of the United States.

For most of its history, the Fed affected monetary policy through some simple tools – overnight lending rates and bank reserve requirements.

Since 2008, the Fed has expanded its reach. It now operates in more sectors of the economy than just banking. For example, the Fed supports mortgage lending and housing markets by holding $1.4 trillion of mortgage-backed securities, having purchased more than $230 billion just this month.

Furthermore, the Fed continues to purchase government debt, as Congress approves higher budget deficits. This is known as monetizing the U.S. debt. The Fed’s actions allow for a higher level of government spending and intervention in the economy than would be possible otherwise.

Ten years ago, Judy Shelton, now the controversial Fed nominee, argued that continued deficit spending would impair our country’s ability “to remain a self-determining nation.” More recently, she argued that the Fed’s “large-scale interventions in credit and investment markets have created significant distortions that threaten financial stability.”

With such strong words, it’s no surprise that Ms. Shelton didn’t receive a warm welcome on Capitol Hill. Policymakers don’t like to hear that they may be doing more harm than good.

In her testimony before the Senate, Ms. Shelton said she hoped “to contribute intellectual diversity as a [Fed] Governor”, and that she “would work collegially to promote sound money and sound finances.” However, what her previous work and arguments point out is that that Fed just can’t help.

As Adam Smith and other early economists knew well, monetary policy is ineffective. Neither Congress nor the Fed can control or predict investor and banker behavior. Low interest rates and mortgage-buying has not, and will not, produce the real economic growth policy makers expect.

Ms. Shelton’s message is a tough but needed lesson.

Peter Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. prcrabb@nnu.edu

This story was originally published February 20, 2020 at 5:00 AM.