GOP senators face new loyalty test in whether to approve Trump's controversial Fed nominee Shelton

An outspoken Fed critic, Shelton is best known for her controversial views on monetary policy: She has suggested the United States doesn't need a fully independent central bank and has advocated strongly for the nation to return to something akin to the gold standard. Several GOP senators on the banking committee said they have questions for her. Yes votes from all Republicans will likely be needed to advance her confirmation since the banking committee is split along party lines 13 to 12.

"There are a lot of questions about her," said Sen. Richard Shelby, R-Ala., a senior member of the Senate Banking Committee which has to approve Fed nominations. "I have a few, but I'm not the only one."

Shelby said he planned to listen closely to her answers at the Feb. 13 hearing, which will also include Trump's other nominee, St. Louis Fed economist Christopher Waller. Democrats on the Senate Banking Committee are likely to vote against Shelton.

"I have an interest in having solid, mainstream people on the Fed," Shelby said in an interview. "Some people say that she's not, others say she is. Let's see what she says."

How Shelton responds to lawmakers' questions could make or break her nomination, according to five banking lobbyists who spoke on the condition of anonymity to discuss the confirmation hearing frankly. While much of the media attention has focused on Shelton's views about gold, the banking community is more alarmed by her desire to end federal deposit insurance that currently ensures Americans' deposits of up to $250,000 at banks. And her recent questioning of the Fed's overnight borrowing market, referred to as repo operations, which is a critical way the Fed keeps cash flowing through the financial system.

Trump's last four Fed nominees failed to make it through the confirmation process, a rare defeat for the White House in the GOP-controlled Senate. Politically, it would be difficult for Republican senators to go against Shelton, after they just voted to acquit the president of impeachment charges and Trump's reelection campaign is humming along with substantial funding.

While many of Shelton's stances are outside the mainstream, many Republicans and financial insiders say she presents little risk to the Fed - or the broader economy. If confirmed, she would be one of seven Fed governors and one of 12 voting members of the Fed's committee that sets interest rates, meaning her influence would be small.

"I don't think she belongs on the [Fed] board, but it's not going to be the apocalypse," said Tony Fratto, a former Treasury official for President George W. Bush who now runs a consulting firm. "She's not going to change the direction of monetary policy."

There is concern among Fed watchers that Trump is positioning Shelton as the next Fed chair, a position that would give her extensive influence and power to enact more unconventional policies. Trump appointed the current Fed Chair Jerome Powell, but he has repeatedly expressed regret with the choice and looked for ways to remove Powell, whose term ends in early 2022.

"Anyone who thinks Shelton would be just one of 12 votes on monetary policy hasn't been paying attention to her courtship of the White House and Trump's feud with the Fed. You can't support Powell and vote to confirm her," said Sam Bell, an avid Fed watcher and founder of Employ America, a policy group that advocates for full employment and higher wages.

Sen. Mike Crapo, R-Idaho, chair of the banking committee, is moving quickly to push through the nominations, which is alarming some in the industry who would prefer a well-vetted process.

"This fast-tracking of the Shelton nomination is mind boggling. It is as if they have not read anything she has said," tweeted Diane Swonk, chief economist at Grant Thornton. "She is not only unqualified, she is dangerous. She has advocated policies removing deposit insurance and policies that would undermine community banking."

But Shelton has already won over Sen. Kevin Cramer, R-N.D.,, who played a key role in sinking businessman Herman Cain's Fed nomination last year. Cramer met with Shelton on Tuesday and said he intends to support her despite "what some might consider her more exotic views."

"I kind of like having somebody that challenges status quo like Judy on it," Cramer said. "I wouldn't want five members like her."

Sen. Thom Tillis, R-N.C., another Banking Committee member, also anticipated a lively confirmation hearing. But like many Republicans, he brushed off some of her more contentious views by arguing they do not matter since there's no way the United States is going to return to the gold standard anytime soon.

"I'm sure the gold standard question will come up. Honestly, there's no way to do it given where we are with our balance sheet," Tillis said. "There's just no way the math works right now."

Sen. Patrick Toomey's, R-Pa., has also expressed concern about trying to move the United States back to the gold standard, which most economists think is a mistake and would severely hamper the nation's ability to get out of a recession. Toomey's office declined to comment on Shelton this week.

Sen. Elizabeth Warren, D-Mass., a high profile banking committee member, has called Shelton's views "radical" and questioned the nominee's apparent flip-flopping on her views of interest rates.

In the aftermath of the Great Recession, when Barack Obama was president, Shelton frequently criticized "ultralow" interest rates. But in recent months, she has become an advocate of lower interest rates, which critics say is more politically driven to align with Trump.

In prior interviews with The Washington Post, Shelton has stressed that she does not speak with Trump and has always been an independent thinker. Shelton served as an informal adviser to Trump's 2016 campaign and was his pick for U.S. executive director to the European Bank for Reconstruction and Development, a position for which she was confirmed by the Senate in 2018.

Shelton, who holds a PhD in business administration from the University of Utah, spent much of her career writing books and heading up the Sound Money Project. "We make America great again by making America's money great again," Shelton wrote in a 2018 essay for the libertarian Cato Institute.

Waller, the other Fed nominee to go before the Senate Banking Committee next week, has spent the past decade as an economist and research director at the St. Louis Fed, one of the regional Fed banks. He is an outspoken supporter of Fed independence and is widely viewed as a noncontroversial nominee. Bank lobbyists said pairing Waller and Shelton together was a shrewd move by the White House that could help ease Shelton's confirmation.

The Post surveyed 18 Wall Street economists and financial lobbyists last summer shortly after Trump floated the two candidates' names on Twitter, all supported Waller, but only eight said Shelton should be confirmed

A senior Trump administration official, speaking on condition of anonymity to discuss private deliberations, said that the administration does not anticipate any problems getting Shelton confirmed. Her meetings with senators have been successful, this official said, and "her confirmation process in committee remains on track."

But a prior Trump nominee to the Fed, Marvin Goodfriend, weathered a rough confirmation hearing in early 2018. He struggled to explain why he was wrong in predicting high inflation would ruin the economy in the aftermath of the Great Recession, as the Fed lowered rates and stimulated the economy. (Goodfriend died in December.) Republican leaders did not think they had enough votes to confirm him and never brought him up to be confirmed by the full Senate. Shelton's nomination risks a similar fate if she cannot make it through her hearing relatively unscathed.