A Fed rate cut could be a revolutionary moment: Former Fed nominee Judy Shelton
Simmer down rate cut cheerleaders, says Donald Trump’s one-time nominee to join the Federal Reserve.
“It [rate cuts] shouldn’t be a big moment. I mean we shouldn’t have everybody talking about what the Fed is going to do,” veteran economist Judy Shelton said on my Opening Bid podcast on Yahoo Finance (see video above or listen here).
“I think it could be a revolutionary moment in the sense that people who never really experienced inflation before, who really never had the purchasing power pulled out from underneath them, may be paying more attention and I think starting to question a system that depends on the discretion of a dozen people voting eight times a year.”
Shelton’s nomination to the Fed famously stalled in 2020 amid intense criticism by lawmakers mostly on the left. Some saw her economic ideas as too extreme to be included in the Fed consensus.
That apprehension primarily stems from Shelton’s consistent support of the gold standard through the years.
Under such a system, a country’s currency is pegged to the value of gold. The government establishes a price for gold and buys and sells it at said price. The value of the country’s currency is then tied to this fixed price for the yellow metal.
The gold standard came under fire during the Great Depression as people in financial crisis hoarded gold rather than socking it away in the banks, the St. Louis Federal Reserve Bank explains. Consequently, countries around the world ran out of gold. In effect, they were forced off the gold standard.
The US officially opted out of the gold standard for domestic transactions in 1933, and halted international conversion of the dollar to gold in 1971.
Today, the US uses a government-issued currency that’s not backed by gold. Otherwise known as fiat money, its value is derived from the government deeming it an acceptable form of payment.
Despite a contentious nomination process she acknowledges was hurtful, Shelton remains steadfast in her beliefs around monetary policies. She doubles down on theoretical reforms to the financial system in her new book: “Good as Gold: How to Unleash the Power of Sound Money.”
“I hope people start to say we want take back the money, and we think the value of the money should be inherent. It should work the same way for everyone instead of having a central bank that can slant economic and financial rewards to one group of citizens at the expense of others,” Shelton says.
But before all of that, about those looming interest rate cuts.
The Federal Reserve held interest rates unchanged on Wednesday, though it set the table for a September rate cut by calling out “some further progress on inflation.” Fed chair Powell told reporters after the decision that a September rate cut “could be on the table.”
“The reality is inflation is slowing and the Fed doesn’t need rates this high anymore. In fact, one very real worry is the economy could slow over the coming quarters and this is why rate cuts are necessary. We think three cuts this year are quite likely,” Carson Group chief market strategist Ryan Detrick said.
A pre-November presidential election rate cut would also underscore how the Fed is more a political institution than people believe, Shelton reasons.
“It’s political. I mean, that [a rate cut] will send a signal that will be very positive for markets. People will feel better. It’ll start to reduce the cost of borrowing. People who hope to get a mortgage will say that’s, that’s good,” says Shelton.
Asked if she would consider being Fed chair if Trump wins the White House and puts her name forward, as Trump’s long-time economic advisor Stephen Moore have floated to me, Shelton remains open-minded — though declined to emphatically say yes.
“Well of course it would be an honor,” Shelton added.
Three times each week, I field insight-filled conversations with the biggest names in business and markets on Opening Bid. Find more episodes on our video hub. Watch on your preferred streaming service. Or listen and subscribe on Apple Podcasts, Spotify, or wherever you find your favorite podcasts.
In the below Opening Bid episode, Citi director of US equity strategy Drew Pettit sounds the alarm bell on AI stocks but also explains why he differs with his team on the direction for the domestic economy.
Brian Sozzi is Yahoo Finance’s Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations, or anything else? Email [email protected].
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