Saturday, January 28, 2023

Fed Watch: Shelton Heads For Senate Approval As Powell Dampens Vaccine Euphoria


It looks like the stars have finally aligned for Judy Shelton, a recovering gold standard advocate, to join the Federal Reserve Board of Governors, after Senate Majority Leader Mitch McConnell pushed through the procedural vote that paves the way for her confirmation as early as this week.

The former economic adviser to Donald Trump has been waiting on the pleasure of the Senate since the president first announced her nomination in July 2019.

The Senate Banking Committee approved the nomination this past July in a strictly partisan vote, and McConnell had to wait until Alaska Senator Lisa Murkowski gave him enough Republican votes to confirm Shelton. Two other Republicans—Mitt Romney of Utah and Susan Collins of Maine—said they would not vote for her.

Permanent Voting Member Could Challenge Group Consensus

McConnell is using his window of opportunity while he still has a 53-47 majority in the lame-duck Senate to get her onto the Fed board, where she will be a permanent voting member on the policymaking Federal Open Market Committee (FOMC).

Shelton may be a permanent voter, albeit only one out of 12 voting members at any given time. The White House says in her favor that Shelton will challenge some of the assumptions of a group driven by consensus, implying that is a good thing.

She’ll fill a board position that runs until January 2024. Christopher Waller, an economist at the St. Louis Fed who was nominated at the same time as Shelton, is far less controversial and was not part of the procedural vote for confirmation next week. He may have to cool his heels a bit longer.

Filling Fed board vacancies obviously does not have the same urgency as confirming Supreme Court justices. The board, which has seven seats, has been operating with only five members since 2018, and was briefly reduced to three members before Trump found acceptable candidates for two open positions.

Recovering To A Different Economy

FOMC members had a lot to say last week after observing their quiet period in the week preceding the November 4-5 meeting. Fed Chairman Jerome Powell came out with a dark prediction about the disruptions ahead as he warned that the world as we knew it may not be coming back.

“We’re recovering, but to a different economy,” he said at a virtual meeting of the European Central Bank’s Forum on Central Banking. The pandemic shutdowns will have a lasting effect on economic activity, and some workers—notably restaurant employees and others requiring face-to-face interaction—will bear a bigger share of this shift.

Powell’s prediction put a big damper on vaccine euphoria. He reiterated his belief that Congress will have to do more and hinted that the Fed, too, will have to add some stimulus.

Boston Fed chief Eric Rosengren also did his bit to temper the exuberance over the success of the experimental vaccine from Pfizer (NYSE:) and Germany’s Biontech (NASDAQ:) in clinical trials.

“It’s still going to be quite difficult to distribute it widely and there’s still an open question of how many people will get voluntarily vaccinated,” Rosengren said on CNBC-TV. He thinks there will be robust growth in the second half of next year, but he forecast the next six months will be “pretty choppy.”

James Bullard, head of the St. Louis Fed, struck a more optimistic note on Friday. In remarks to reporters, he said monetary policy is in a good place right now and he is not even sure that more fiscal stimulus is needed, saying the first round of government aid was so massive it’s still supporting the economy.

In his prepared remarks to the Economic Club of Memphis, he went so far as to say:

“U.S. monetary and fiscal policies have been exceptionally effective and were designed for a larger shock than the one that has occurred.”

Bullard said that if all those on temporary layoffs are recalled, could sink below 5% from the 6.9% in October. However, he added that downside risks remain “substantial,” and said much will depend on observing health precautions.

Other policymakers suggested that more government aid will be needed, but in a more targeted fashion than the shotgun approach in the $2.5 trillion of pandemic aid in March and April.

Mary Daly, head of the San Francisco Fed, said in a Reuters interview that unemployment insurance will have to be extended as well as more funding like the paycheck protection program. Dallas Fed chief Robert Kaplan echoed her support of the PPP but also shared Rosengren’s concerns that the next six months will be “very challenging.”

In a separate interview with CNBC, San Francisco’s Daly said policymakers had a “robust debate” about asset purchases at their early November meeting. She said:

“We have asset purchases well in place and we are discussing what more we could do if more is needed and what should we do in terms of communicating a plan for asset purchases going forward.” 

Meanwhile, the Fed’s Financial Stability Report discussed risks from climate change for the first time. Identifying a catalog of potential risks, the report concluded:

“Federal Reserve supervisors expect banks to have systems in place that appropriately identify, measure, control, and monitor all of their material risks, which for many banks are likely to extend to climate risks.”

In remarks on the release of the stability report, Fed Governor Lael Brainard welcome the inclusion of climate risk. “A lack of clarity about true exposures to specific climate risks for real and financial assets, coupled with differing assessments about the sizes and timing of these risks, can create vulnerabilities to abrupt repricing events,” she said. 

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