Why Is the Fed So Afraid of Judy Shelton?

In spite of fierce opposition from numerous US Senators—and countless screeds against her issued by pundits and establishment economists—Judy Shelton still has a chance of being confirmed to the Fed’s Board of Governors this week.

The Associated Press reported yesterday what in spite of three GOP Senators coming out against Shelton, she may still win confirmation in a close vote.

But why so much opposition? On one hand, some oppose her because she reportedly opposes the Fed’s alleged and generally mythical “independence.” 

I suspect the real opposition to Shelton stems from her past comments about the role of the Fed, and since she has, in the horrified words of economist Laurence Kotlikoff: “advocated for a return to the gold standard … she has even questioned the need for a central bank at all.”

The reality of what policies Shelton would actually push if ensconced in the Fed cannot be known at this time. But it is clear that the Fed’s backers don’t want to even risk it.  Although Kotlikoff, for instance, rather unconvincingly claims he values a “diversity of viewpoints” on the Fed board, this “diversity” must fit into a very narrow window of acceptable opinion. 

But this raises a question: so what if a solitary member of the Board of Governors takes views seen as unorthodox by the technocrats who currently control the Fed’s board?

Before we can answer this question, we must first take a what the Fed and its backers consider to be “orthodox” policy.

The Economists’ Technocratic Facade

We’ve seen it at work in recent years. It consists of repeatedly ratcheting up the central bank’s asset purchases, funded with newly created money. This is done to prop up banks and other financial institutions deemed “too big to fail.” The orthodoxy consists of keeping interest rates at rock bottom levels, also accomplished through printed-money-financed asset purchases. This is done both to punish savers and to promote additional lending in the name of inflating prices so as to achieve the fabled two-percent inflation standard. These ultra-low interest rates, of course, are also lauded by the regime which can engage in more and more deficit spending so long as interest on the national debt remains low.

The technocrats on the Fed board, posing as “scientific” economists, have created a façade in which they are data-driven, and committed to certain principles of economic analysis.

The reality, however, is something far different. The real strategy is simply one of repeatedly hitting panic buttons every time it appears a new economic crisis is on the horizon. This occurred with the financial crisis and Great Recession. It began again with the repo crisis in late 2019. And it was taken to new unprecedented levels yet again with the economic crises of 2020.

Although the Fed repeatedly claimed it would “soon” normalize policy, it has never followed through, and the Fed has now effectively monetized trillions of dollars of US assets in the hops of propping up financial sector while keeping government interest payments low.

Obviously, these political favors could not be doled out to financial and government elites at anywhere the necessary scale without a central bank and without a fiat currency totally unmoored to any commodity.

Thus, any economist who dares challenge the orthodoxy that central banks are of immense and central importance to avoiding complete economic collapse must be treated as a pariah.

The Myth of Diversity on the Fed Board of Governors

What if someone opposed to this policy agenda and supportive of hard money were allowed to join the Board of Governors?

It might be said this person would be a “super-hawk” on the board, far beyond even the current breed of mild inflation hawks found on the FOMC like Esther George and Eric Rosengren.

But would this super-hawk be able to actually change the Fed’s policy in terms of interest rate targets or asset purchases?

It’s unlikely, at least in the short or medium term.

When it comes to setting macroeconomic policy, the Fed primarily relies on the Federal Open Market Committee (FOMC). This committee consists of the seven members of the Fed’s Board of Governors, the president of the New York Fed, and four of the other seven Federal Reserve Bank presidents, serving one-year terms.

Our imagined super-hawk would have only one vote, and it’s unlikely this one vote would do much to turn the tide of the current voting dynamic on the FOMC where dissent from the Fed chairman’s preferred policies are fairly rare.

In a 2014 study for the St Louis Fed, researchers Daniel L. Thornton and David C. Wheelock found that dissents from the Chairman’s position are not exactly common. The Fed, after all, likes to function on a “consensus” model so it can give the impression that there is wide agreement in favor of its policies.

From 1957 to 2013,

Of 7,094 votes cast for FOMC policy directives during these years, 6,645 (94 percent) supported the majority[—i.e., the Chairman’s position—]and 449 (6 percent) were dissents. … Dissents were particularly high during the 1962-65 and 1978-80 periods. The annual number of dissents was less than 15 in all other years and 10 or fewer in most years. There were especially few dissents during 1994-2007.

Alan Greenspan was notable for taking an intolerant view toward dissenters, so it’s not surprising that the number of dissents was especially low once he was able to consolidate political power in the early nineties. This continued through the end of his tenure in 2006. Moreover, the lack of dissent during Greenspan’s era was likely helped by the apparent strength of the economy during this time.

Since the Greenspan era, dissents have increased, but not to levels seen more commonly during the 1960s and 1970s.

The media is fond of claiming the FOMC in recent years has exhibited “record dissent,” but this is only true if one takes a very short-term view. Yes, dissents are higher in the past decade than was the case during the Greenspan years, but that’s hardly evidence of a “divided” FOMC.

We can see this in recent vote margins. For example, in March, when the Fed slashed its target interest rate to 0.25 percent, there was only one dissenting vote out of ten voting members. No FOMC meeting has produced more than three dissenting votes in the past decade. The “closest” vote occurred in September 2019 when the committee voted 7-3 in favor of Powell’s plan to lower the target interest rate to two percent.

And why do members dissent? The most common reason for dissent occurs when a relatively hawkish member of the FOMC opposes the full extent of the Chairman’s dovish policy. Often, the dissenting member wants either a smaller cut to the target interest rate than the proposed cut, or no cut at all.

But sometimes, members dissent because they want even more dovish policy than that proposed by the Chairman. For example, last September, when three members of the FOMC dissented, only two dissents were for hawkish reasons. A third dissenter wanted an even lower interest rate than Powell.

Thornton and Wheelock have shown that when dissent does occur, it is usually for hawkish reasons. Examining 409 dissents from 1936 to 2013, 249 of them were because the dissenting member wanted “tighter” monetary policy.

Moreover, it is notable that most of these dissenters wanting tighter policy were not from the Fed’s Board of Governors (which has seven votes on the FOMC), but were among the FOMC’s rotating member bank presidents.

For example, the most common dissenters in recent years have been bank presidents Goerge and Rosengren, of the Kansas City and Boston banks, respectively.

Indeed, dissenting votes on the FOMC from members of the Board of Governors have been extremely rare over the past twenty years.

Returning to our hypothetical super-hawk on the Fed’s Board of Governors: he or she would be part of a very tiny minority on the Board of Governors itself, and part of a small minority on the FOMC.

Basically, there is very little danger of someone like Judy Shelton upending the Fed’s policymaking processes or its beloved consensus model.

On the other hand, as has become clear form the Shelton controversy, the Fed and its supporters have no interest at all in hearing any opinion from outside the narrowly defined orthodoxy that is currently deemed acceptable on Capitol Hill and within the Fed itself.

Allowing any members who might call for any move toward commodity-backed money, or might seriously question the panic-button methods currently and capriciously used by Fed officials might provide a platform for anti-Fed rhetoric and commentary. While this would have no hope of directly changing votes on the FOMC among a lopsided majority of governors, it might nonetheless help to undermine the official narrative the Fed so carefully guards.