A few points before the Senate Banking Committee hearings get underway later this morning for President Trump’s two nominees to fill the remaining vacancies on the Federal Reserve Board of Governors:
** Barring a spectacularly poor performance by either nominee today, Christopher Waller, the current head of research at the Federal Reserve Bank of St Louis, and Judy Shelton, the controversial conservative economist, are both likely, certainly Waller, to win the recommendation by the Republican-controlled Banking Committee for confirmation in a promised fast-tracked floor vote by the full Senate.
** That means Waller and Shelton could be confirmed in time for them to add their distinctly dovish views to the deliberations of the Federal Open Market Committee as soon as the March 17-18 meeting, though their first attendance is likely to be the April 28-29 meeting.
** But we would caution that while Waller’s academic credentials make him near certain to be confirmed, the odds are not negligible that Shelton could still be derailed, depending on her performance in today’s hearings. The Republican control of the 25 member Committee is by a slender 13-12, single vote margin, and while many of the Republicans on the Committee, including its Chairman, Mike Crapo, have already expressed their support for her confirmation, most of the comment has been lukewarm at best.
** Most critically, the pivotal Committee member to watch, and whose questions and eventual vote will by our account determine whether Shelton becomes a member of the Fed’s Board of Governors, is the influential Alabama Senator Richard Shelby, who we understand is not yet totally convinced of her qualifications to be on the Board of Governors.
Shelby to Determine Shelton’s Fate
Shelby has been typically elliptical if not cagey in his public remarks about Shelton, mostly noting he will have “a lot of questions, as will others.” Shelby, who is the former Banking Committee Chairman, often adopts such a stance prior to his hearings to maximize his influence over the course of a testimony and to ensure his questions are addressed in a serious and thorough manner.
He may even give his questions a sharp edge to test how she handles herself. That said, it remain a low bar for Shelton to jump, and Shelby is still likely to vote to confirm Shelton.
But the decision will be made at the hearing itself, and will depend on how she handles herself in avoiding ideological excesses, and in how she answers the questions about her previous writings and opinions about bank depositors insurance, the call for a return to the gold standard and, critically, her seeming doubts over the need or extent of the Fed’s operational independence and what by most accounts are seen as stark, politically motivated flip-flops on her monetary policy views, depending on whether a Democrat or Republican is in the White House – all of which Shelby is said to find questionable.
If Shelby concludes that Shelton fails to be truthful during today’s hearing under oath, we believe the chances rise quickly that Senator Shelby will seek a delay in her confirmation. Delay often leads to denial. It is important to note that Senator Shelby’s words of caution regarding his vote came after his one-on-one discussions with her.
Chairman Crapo has promised a vote within a week of today’s hearing, which can go one of three ways: to recommend confirmation to the full Senate – and Senate Majority Leader Mitch McConnell is said to have instructed his staff to prioritize floor scheduling to move as quickly as possible once the Committee referral is received; to reject the nomination, or; to process the referral to the Senate but without Committee recommendation.
It is doubtful, however, that Majority Leader McConnell would proceed with a floor vote on the latter, as the probabilities would then certainly rise that three or more Republican Senators would threaten to vote no if the confirmation came to the floor.
Waller a Likely Influential Governor
Waller, on the other hand, is a well-regarded head of research at the St Louis Fed under its President James Bullard, who recommended him to the White House as a potential nominee soon after the derailment of previous nominees Herman Cain and Stephen Moore.
The two have long worked closely together, dating back to their academic years, and Waller played a key advisory role in helping to shape Bullard’s more distinctly dovish policy stance during the latter stages of the policy normalization strategy that brought the policy rate to 2.25%-2.5%, or just under a then estimated neutral rate, by the end of 2018.
He likewise shares an intellectual affinity with Vice Chairman Richard Clarida as well as Bullard, in an early skepticism over the Phillips Curve assumptions underpinning a labor slack-based inflation dynamic, and he was among an initial group of Fed staff and academics in raising early concerns over what looked to be an equilibrium real interest rate, or r*, that was considerably lower than the levels presumed at the time.
Waller is also said to be sympathetic to the views that any role for the Fed in a return to unconventional policy measures like QE at the Zero Lower Bound will inevitably need to assume a secondary supportive role to a more muscular fiscal stimulus in the lead policy response to a deep recession.
Although Waller and Shelton were purposely paired to make Shelton seemingly more acceptable to any skeptical Republicans, we understand a vote on Waller’s confirmation could still proceed, and so regardless of Shelton’s fate, Waller is likely to become a Governor on the Federal Reserve Board by this spring.
In particular, we think he will have a fairly influential say, at least for a “rookie” governor, in the final debates over the final drafting of the FOMC’s Policy Framework Review. Due to be unveiled at the June meeting, at its core the long-awaited PFR is likely to entail consensus language changes to the Statement on Longer-run Goals and Monetary Strategy.
It is meant to underscore the true symmetry of the Fed’s 2% inflation target, essentially a confirmation of the Fed’s much more dovish reaction function going forward, a policy stance Waller would strongly endorse