The Fed’s getting a gold bug
Read the full edition of Mundo #17 here.
The U.S. Federal Reserve, the country’s central bank, has been a crucial factor in driving an enormous turn around in capital markets since the extreme sell-offs in March. After Fed Chair Jay Powell committed to buy securities “for as long as it takes”, slashed interest rates, and played an essential roll in Congress’ stimulus policies, equities surged and record bond issuances followed.
Yet for as long as the pandemic grows in the United States, economic uncertainty will persist. Continued monetary and fiscal support during this time will be crucial.
Trump’s latest push to appoint Judy Shelton to join the Fed’s Board of Governors (pending confirmation by the Republican-controlled Senate) would add uncertainty into the Fed’s culture of consensus. Shelton’s views are controversial, and include calls to return to the gold standard, and for less bank independence and closer (ie. politicised) ties with the White House. Such views are dismissed by conventional political economists, and it provoked significant hesitation with Republicans on the Senate Banking Committee before they relented this week.
Shelton is just one vote amongst seven on the Board of Governors, and twelve in the rate setting Federal Open Market Committee (FOMC). Decisions without general consensus are rare, and while Shelton’s alternate views wouldn’t derail Fed decision making, it would be disruptive, and wouldn’t “add value” to a room full of otherwise conventional-minded economists.
In a note last month, famed investor Howard Marks saw the market rally resting on fragile foundations of an improving virus load (no longer the case), and the market’s faith in the Fed’s commitment to support these markets. If Shelton is appointed, the latter assumption should be viewed more cautiously.
Trump’s persistent attacks on Fed Reserve Chair Jerome Powell since his 2018 appointment raises the possibility that Powell won’t be reappointed when his current term concludes in 2022. He did so in 2018, removing Janet Yellen, appointed by the Obama Administration. This has some worried that Shelton — a former economic advisor for Trump’s 2016 campaign — could be tapped for the role if Trump wins a second term. This would be a big deal — while the Fed Chair doesn’t officially have greater power within the FOMC than other members, a rate decision without the Chair’s support hasn’t occurred since the 1930s.
Analysing Fed policy and sentiment can be dry. Yet the Fed’s actions as the country and world’s “lender of last resort” is the anchor point for the entire international banking system. When this anchor point moves, economic ripples radiate globally. In times of market crisis, such as March this year and 2007/08, its interventions averted complete meltdown.
Trump’s sustained criticism of Jay Powell’s actions and removal of Janet Yellen has already eroded market perception of the Fed’s independence. Appointing Judy Shelton would only be a further step in that direction, as the U.S. economy teeters on a knife’s edge.
