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Are The Winds of Change Coming to The Federal Reserve?

Once again, the time has come to appoint four new members to The Federal Reserve Board of Governors. Although the appointment of new members usually doesn’t result in any major monetary policy changes, the current board’s delicate balance could easily shift in a more conservative direction depending on who’s chosen. Given Trump’s history of publicly criticizing The Fed Chair Jerome Powell and his monetary policy, there’s a strong expectation that the new appointees will include people whose monetary policy preferences are much more favorable for The President’s interests in maintaining strong economic growth.

One of these agents of change could potentially be Judy Shelton, who’s known for her unorthodox stances on monetary policy. Shelton caught the media’s attention by openly stating that she belives The Federal Reserve in it’s current form has become obsolete. According to her, not only does The Federal Reserve not need to be an independent institute, but rather it’s indepence is the core of the problem. The argument is that in this case efficiency is more important than the separation of powers, meaning US economic policy would be much easier to implement if the government directly had a hand in how The Fed operates. These opinions are more than just outside the box, they’re generally seen as quite radical.

The Gold Standard

Another one of her unconventional beliefs is her support for restoring the gold standard, which would be near impossible to implement, considering how the supply of money increased much more rapidly than the amount of physical gold actually mined. This idea is something usually floated by countries where gold mining makes up a significent portion of the country’s GDP, such as Russia for example. For them it would be a massive boon given their large gold deposits. In addition, any even remotely serious discussion about restoring the gold standard would also carry a significant risk of weakening the US dollar, which would be an even greater benefit for Russia.

Federal Deposit Insurance

Sheldon continued to shock the world of finance by speaking out against the $250,000 Federal Deposit Insurance, which she considers an unnecessary burden on financial institutions and The Fed. Her claim is that it takes money out of the economy to cover for an event that’s highly unlikely to occur. Doing away with deposit insurance or even just leaving it to the private market instead would remove an additional mechanism meant to safegard low income households from an economic crisis and move the country more towards a laissez-faire economy. Every developed country with a complex monetary system has some form of deposit insurance. Clients with capital deposits of far more than $250,000 typically already have their own separate insurance. Meanwhile low earning households have little incentive to pursue private insurance against bank default, meaning they are the ones most at risk then it does happen. These households are the primary beneficiaries of the policy Shelton finds objectionable.

Overnight Repo

Shelton has also spoken on Overnight Repo, which is the buying of securities with the promise that the seller will re-purchase them the following day. This is fundamentally a method to ensure the banking system has enough liquidity and The Federal Reserve also uses them to keep transactions between banks accountable. It’s a powerful tool for ensuring the stability of the US monetary system which could be considered one of the core duties of The Fed. On the other hand, in the case of currency spot transactions, this type of agreement also means that when the dollar is bought for currenencies with lower base interest rates, the seller receives a daily interest. This no doubt significantly contributes to keeping the dollar’s value high. It also means that The Fed will have a hard time weakening the dollar, when investors are encouraged ot act under the assumption that the dollar will continue to strengthen perpetually. Lowering base interest rates is one way to potentially weaken the dollar, but The Federal Reserve remains unable to commit to that strategy as long as wage and GRP growth keeps inflation relatively high.

As outlined above, her opinions often coincide with those of President Trump, which begs the question of whether she’s going to support The Fed’s monetary policy or The President’s economic strategy. Either way, even if she doesn’t completely shift the board of governors’ balance, The President’s way of thinking will have gained a strong ally and a foothold in The Fed.

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