Judy Shelton, President Donald Trump's controversial pick for the Federal Reserve Board of Governors, saw her bid blocked by the Senate on Tuesday, as a key procedural vote fell short of the votes needed to advance the onetime gold standard-adherent nomination to join the central bank as a voting member.
The final vote to block the nomination after last-minute jockeying for pivotal votes came down to two Republican Senators in Covid-19 quarantine, and Vice President-elect Kamala Harris changing her schedule to cast a vote.
Senate Majority Leader Mitch McConnell surprised observers when he announced plans to hold a floor vote on Shelton’s confirmation this week during the lame-duck session of Congress.
McConnell’s move came after a moderate Republican Senator, Lisa Murkowski of Alaska, said she would support Shelton’s nomination, leading McConnell to believe that he had the votes to advance Shelton’s nomination on a nearly party-line split, with Vice President Mike Pence able to cast a tie-breaking vote if necessary. Tennessee’s Lamar Alexander issued a statement Monday confirming his opposition to Shelton but said he would not be able to attend a vote this week.
Republicans in the Senate hold a 53-47 advantage: Shelton previously had been expected to be confirmed by the full Senate by the slimmest of margins, since Republican Senator Mitt Romney of Utah and Susan Collins of Maine had expressed opposition to Shelton, Alexander was not in the capital and Senator Rick Scott, R-Fla., was in self-quarantine due to potential Covid-19 exposure.
The equation shifted on Tuesday, when Republican Iowa Senator Chuck Grassley said that, he, too had to quarantine after Covid-19 exposure and could not vote. He announced later on Tuesday that he had tested positive for the virus. When Harris changed her plans to vote against the nomination, the final vote became 50-47 to block the nomination.
It would have been a razor-thin 49-48, but McConnell changed his “yes” vote to a "no" in order to get the option to bring up the vote again at a later date. The window of time to do so, though, is running out. Newly elected Arizona Senator Mark Kelly, who flipped his seat from Republican to Democrat, will be eligible to take his seat at the beginning of December, potentially flipping the balance.
“The fact that she’s running into a little bit more resistance is reassuring,” Kenneth Kuttner, an economics professor at Williams College, said before Tuesday’s vote took place. “She’s come out and essentially called into question the idea that the central bank should be fully independent. That’s definitely a minority view,” he said.
Shelton also was known for her unorthodox support for the gold standard, an archaic policy concept to which no developed economies today adhere. Loosely, the gold standard mandated that every dollar in circulation be backed by gold or another precious metal like silver. It was viewed as a mechanism against inflation, since the Fed would have limited policy tools for expanding the money supply, providing market liquidity or backstopping lending or credit markets.
“Sen. Alexander’s decision, combined with Sen. Scott’s quarantine, puts this contentious nomination back in limbo,” Karen Shaw Petrou, co-founder of Federal Financial Analytics, a financial-policy consulting and analysis firm, said ahead of the vote. This raised the likelihood that confirmation would come down to a tiebreaker vote cast by Vice President Mike Pence.
That turned out to be a risky political gamble for the Majority Leader. “Ultimately, Sen. McConnell will need to decide how much he wants to press his colleagues to ‘pack’ the Fed for this nomination to advance,” Petrou said.
Shelton's nomination passed the Senate Banking Committee this year along party lines, with all 12 Democratic members in opposition.
“She has advocated for failed Great Depression-era policies — like a return to the gold standard and the removal of deposit insurance — that would make our economy more volatile,” those members wrote in a joint statement urging the Committee chair to hold an additional hearing.
Stifel chief economist Lindsey Piegza said the cracks in Shelton’s Republican support indicated “growing concern” about the potential politicalization of monetary policymaking.
“Her previous positions or connections to the White House, coupled with comments of reducing the independence of the Federal Reserve Board, have raised concerns for those who wish to maintain and respect the autonomy of the country’s central bank,” she said.
This is a worry that cuts both ways: As much as Democrats might have feared having a pivotal central bank seat filled by someone perceived as eager to bend policy to Trump’s whims, there is unease among Republicans that an overly malleable Fed could abandon its dual mandate of full employment and inflation stability.
Alexander alluded to this fear in his statement, saying, “I don’t want to turn over management of the money supply to a Congress and a president who can’t balance the federal budget.” Alexander added that he was “not convinced” that Shelton’s commitment to Fed independence was as rigorous as it should be for someone in such a pivotal position.
Countries with politically aligned central banks often have to contend with higher inflation or politically cyclical business cycles that are disruptive to business and detrimental to steady economic growth, Kuttner said. “Other central banks’ experience in the past with less than full independence have typically not produced very good outcomes,” he said.