Know Thy Nominee - July 8, 2019
Recently, President Trump tweeted nominations of Judy Shelton and Christopher Waller to the Fed board. Overseas, Christine Lagarde was nominated to follow Mario Draghi as head of the ECB. While these candidates are yet to be confirmed, we were drawn to dive into their pasts to see what we could learn: With apologies to Sun Tzu, “If you know the nominee and know yourself, you need not fear the result of one hundred battles”.
“Wholly Legitimate, and Entirely Prudent” to Question Fed Infallibility
Judy Shelton has been considered a potential candidate for one of the open Fed seats for a while. In a May interview with the WSJ, Shelton explained how she would likely shake up the status quo. First, the article detailed that Shelton “would like to see more market-determined rates”. Second, she has been vocal about eliminating interest payments on excess reserves. These payments, which were part of the QT discussion back in April, are, to Shelton, “like universal basic income for banks. They get paid to do nothing”. Finally, as we tweeted last week, Shelton is in agreement with Trump on currency manipulation but has thrown in a curveball. Much to the excitement of precious metal bugs, Shelton has argued that America has an opportunity to maintain prominence in global monetary affairs by “proposing a new international monetary system linked in some way to gold”.
“Independent, Credible, Accountable, and Transparent”
Christopher Waller, Director of Research at the St. Louis Fed, was a dark horse compared to Shelton. This is not too surprising considering another St. Louis Fed figure, his student and mentee James Bullard, was initially approached by the Whitehouse for the Fed board seat, according to an article from MarketWatch. While he has maintained a relatively low profile, Waller’s research implies his stance on certain issues, including Fed independence, liquidity injections at the lower bound, and TBTF policy. The implications are less-than all-encompassing, and we will be watching for further developments.
“Monetary Policy Alone Cannot Address the Current Delicate Moment”
Rounding out the recent nominees is Christine Lagarde of the IMF, who was nominated by the European Council to be President of the ECB. Not an economist, but a lawyer and politician, Lagarde has spent some time in the monetary policy trenches. Opining on negative rates in 2016, Lagarde argued that subzero rates are “net positives” but presciently warned that such policies are “not without side effects that warrant vigilance”. In a more recent interview with Sara Eisen, Lagarde said she saw dovish talk by central banks as legitimate considering inflation expectations, but warned that monetary policy has been “left to its own in order to fix the situation” and fiscal policy needs to take a larger role. “Those who can spend should spend”.