MNI INTERVIEW: Fed Pause Could Lead To Trump Clash-Ex-Nominee

MNI (WASHINGTON) - Tensions could flare between the Federal Reserve and the incoming administration of President-elect Donald Trump if the central bank decides to stop cutting interest rates early next year because of the president’s policies, former Trump Fed nominee Judy Shelton told MNI. 

Shelton, who advised the Treasury transition team in the first Trump administration, says Fed policy of interest rate “recalibration” makes sense in an environment where the only ones getting pinched by high borrowing costs are small businesses. 

“If they're recalibrating that will dovetail with the incoming Trump administration, because now you lower the cost of capital so the private sector can borrow and that's how you increase supply. That's a good way to fight inflation, from my point of view,” said Shelton, a senior fellow at the Independent Institute. 

However, Shelton worries that the Fed’s modeling of Trump’s policies will lead to the erroneous assumption that they will be inflationary, causing policymakers to prematurely halt rate cuts. (See MNI INTERVIEW: Fed Will Temper Pace Of Cuts In 2025-Bullard) 

That could pit Fed Chair Jerome Powell directly against Trump, who has broken norms by being openly critical of the central bank chief and at one point threatening to fire him. 

“There's this narrative that, oh, you have this tyrannical president who's going to come in and browbeat the Fed. I think the power goes the other way. The Fed is not the little guy in this fight,” she said. 

TARIFFS

Shelton depicted the incoming administration’s desire to impose tariffs on imported goods as a necessary evil in a world of unfair trade practices and currency devaluations – and said they would not necessarily boost inflation because firms and consumers would adjust. 

“There’s this natural sense of saying that in order to give our workers a fair shot and compete fairly, you have to respond to an unfair trade advantage,” she said. 

“It's not necessarily inflationary, unless you expand the money supply or people suddenly have a whole lot more money. People, purchasers, if a product is too expensive, they'll switch to another product.”

FISCAL POLICY

Similarly, Shelton said expansive fiscal policy need not become inflationary if it stimulates growth and investment, thus boosting the economy’s capacity to grow. 

“It was the historically massive fiscal transfers that really put the direct purchasing power in the hands and the bank accounts of Americans, and that is what put pressure on consumer prices much more directly and immediately,” she said. 

Shelton does think the U.S. debt path is unsustainable, and worries that Washington merely pays lipservice to the problem.

“You’re always close [to a crisis] when you have battles over the debt ceiling, downgrades and such. It’s an existential threat in the long term but we’re never on day of the long term – so I think we’re ignoring a huge problem,” she said. 

Still, Shelton believes that Trump’s decision to appoint businessmen Elon Musk and Vivek Ramaswamy to identify and reduce inefficiencies in the federal government is a good strategy. 

“I really like this approach, it’s very promising. That gives me more hope than I’ve had in a long time.”