President Donald Trump is making a third attempt at filling the remaining two seats at the Federal Reserve Board, attempting a “compromise” duo that could deliver on dovish policy.
Trump announced via Twitter Tuesday night that he plans on nominating St. Louis Fed economist Christopher Waller and former Trump transition economic adviser Judy Shelton to the Fed.
Some say the duo is a “compromise,” with Waller being the conventional Fed candidate and Shelton being the candidate more likely to be sympathetic to Trump’s views on monetary policy.
Although both nominees have yet to be officially nominated by the White House, those inside the Washington beltway expect both candidates to be thoroughly vetted, with a focus on the extent of their relationships to the president. The Senate will have the opportunity to examine the nominees once they face a confirmation hearing.
Waller was approached by the White House last month regarding the possible appointment, and met with Trump on Tuesday, according to St. Louis Fed spokesperson Karen Branding.
Waller, a career economist who taught at Notre Dame before heading to the St. Louis Fed, appears to have little history of political ties. In comparison, Shelton will likely face questions on whether or not she has altered her economic thinking to fit the monetary policy needs of the administration.
“Our sense is that Shelton’s path to confirmation is slightly narrower,” Compass Point’s Isaac Boltansky wrote in a note Wednesday morning, adding that Waller appears to be a more “conventional pick.”
Still, both Waller and Shelton appear to favor more accommodative monetary policy, meaning that the Fed board could see a stronger tilt toward dovish policy if they are ultimately confirmed by the Senate.
Third time’s a charm?
Last year, Trump nominated Carnegie Mellon economist Marvin Goodfriend and former Fed official Nellie Liang, only to have those nominations expire and withdrawn, respectively. As Trump boiled over the Fed’s decision to raise interest rates under Fed Chairman Jerome Powell, he nominated campaign adviser Stephen Moore and former pizza executive Herman Cain.
Following the Moore and Cain nominations, this third round of nominees is expected to attract substantial interest as well, especially given the president’s continued calls for changes in Fed policy.
George Selgin, a senior fellow at the libertarian think tank Cato Institute, told Yahoo Finance that the pairing of the “conventional” economist Christopher Waller with Judy Shelton, seen as more sympathetic to Trump, provides something of a “compromise” that the Senate will have to work through.
While little is known about Waller’s views on current monetary policy, he is viewed to favor more dovish policy. Pedro Gomis-Porqueras, a professor of economics at Deakin University in Australia, has worked with Waller over the last 10 years and said he is “more dovish” than hawkish.
Waller appears to believe in a strong firewall between the Fed and the executive branch.
“A central bank’s independence, however, is the key tool to ensure a government will not misuse monetary policy for short-term political reasons,” Waller wrote in a 2011 piece for the St. Louis Fed.
Gomis-Porqueras added that Waller is an “ideal candidate” to be a Fed governor, adding that negative interest rates is one of his favorite topics.
In a 2016 blog post, Waller wrote that using negative interest rates is nothing more than a tax on bank reserves, since such a framework would pay banks to loan out money. His argument: the tax would be have to be borne by someone — the banks themselves, depositors, or borrowers.
“None of this sounds very ‘stimulative’ for consumer spending,” Waller wrote. “But then, no tax ever is.”
Boltansky points out that Goodfriend’s nomination collapsed because of his endorsement of negative interest rates, which have been deployed by the European Central Bank and the Bank of Japan but met with deep skepticism stateside.
“Waller appears to be a more conventional pick and we view his nomination as comparatively better positioned accordingly,” Boltansky wrote.
There could be longer-term implications for the nominations. Powell’s term as chair ends in February 2022, and if Trump wins reelection, Boltansky said Shelton and Waller could be in the conversation for chair.
Brian Cheung is a reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. You can follow him on Twitter @bcheungz.
