MNI INTERVIEW: Fed To Look Through Trump Price Bumps-Shelton
MNI (WASHINGTON) - The Federal Reserve is unlikely to react to the impact of tariffs on prices because it won't represent persistent inflation and the other impacts from Donald Trump's policies will ultimately help dissipate price pressures, former Trump Fed nominee Judy Shelton told MNI.
Tariffs are likely to delay but not prevent a return to 2% inflation and the Fed will likely ease interest rates later this year, she said. "I think they're going to hold tight mostly, and possibly one cut," Shelton said about 2025.
Shelton, a senior fellow at the Independent Institute and former Trump nominee to the Federal Reserve Board of Governors, said there may be some inflationary pressures from the president's tariff policies. "But I don't think the solution is to raise the cost of capital or I will settle for the Fed just standing pat."
"I hope that the Fed can sit through what I think is a transitory impact of switching from a more government oriented growth approach -- lots of government hiring and government spending -- to more of a reprioritized private sector."
TRANSITORY
Increasing domestic U.S. production through lower taxes and less regulation on business will over time ultimately deliver "substantial deflationary effects" and Fed leadership "would kind of like to cut again this year," she said. (See: MNI INTERVIEW: Fed Likely On Hold For Most Of 2025 - Kroszner)
"I get the sense the Fed also doesn't want to raise. They want to stand pat. They'll take the slings and arrows and keep swearing they're going to get to their 2% and I think they will too, if they don't mess up by saying, 'No, now we have to increase,'" she said. "That would be a real blow to what President Trump's trying to do and what I think ultimately makes sense to have a supply side oriented growth agenda."
Shelton said a comfortable interest rate is between 4.25% and 4.5% if the inflation target is 2%. Outside advisers to Trump are reported to be urging the president to consider appointing Shelton to replace Fed Chair Jerome Powell when his term expires next year. The FOMC last month voted unanimously to keep the federal funds rate in a range of 4.25%-4.5%.
FRAMEWORK
The FOMC would do well to consider broadening the issues under consideration in its framework review, Shelton said.
She expects the end of the review to result in a new narrative with lessons learned since the start of the pandemic and the surge in inflation. "They will have learned something about preemptively trying to curtail inflation," she said. Shelton advocates a zero percent inflation target and stopping the practice of paying interest on reserve balances, though she acknowledged those changes are unlikely this time around.
She hopes there is more consideration of how helpful it is to rely on the Phillips Curve in monetary policymaking. "There's no questioning that trade-off between unemployment and inflation and that I think is a mistake," she said. "I wish the Fed would likewise come to say that what we've realized is you can have growth and low unemployment and it's not inherently inflationary if you're increasing output through productive goods and services."