"Things have changed"
By Scott Sumner
The Wall Street Journal describes the views of Judy Shelton, one of the names mentioned for a position on the Fed’s Board of Governors:
She wrote critically in the weeks before that election about how the Fed’s low- rate policies were boosting wealthy investors and corporations at the expense of working Americans and retirees with fixed incomes.
On Tuesday, Ms. Shelton said she is no longer concerned about such perils because she believes the administration’s fiscal policies have boosted growth and productivity.
“Things have changed,” Ms. Shelton said in an interview with The Wall Street Journal, reconciling her earlier views with Mr. Trump’s current call for lower rates. She pointed to Mr. Trump’s tax and regulatory policies that she said have boosted growth without raising inflation as an example of a much-needed tool for supporting economic growth.
Higher economic growth is generally associated with higher interest rates, so I’m not sure I follow this argument. This sort of reasoning seems extremely discretionary, and not in a good way. I favor a rules-based approach to monetary policy. Yes, “things have changed”, but in a direction calling for higher interest rates.
This also caught my eye:
If nominated and confirmed, Ms. Shelton said her main objective would be to scrap the way the Fed currently implements its monetary policy decisions. “What bothers me most about the way the Federal Reserve currently operates is more the mechanism,” she said. “We can talk about whether rates should go up or down,” she said. “I would like to see more market-determined rates.”
That’s also my view. Shelton has suggested the possibility of returning to a gold standard, which would allow for the market determination of interest rates. I favor targeting NGDP futures prices rather than gold, and letting the market set interest rates.
Fed officials agreed in January to abandon the old way of managing the federal-funds rate, which means that paying interest on reserves will be a permanent feature of implementing policy decisions.
Ms. Shelton said she objects to such payments because they are higher than consumers are able to earn on their own deposits.
I also believe that the payment of interest on reserves was a mistake, albeit for different reasons.