Economist Judy Shelton, a former advisor to President Donald Trump during his first term and senior fellow at the Independent Institute, delivered a sweeping critique of the Federal Reserve on Monday.
What Happened: Aligning herself with the former Fed Governor Kevin Warsh's call for “monetary regime change,” Shelton called for a structural overhaul, while questioning the very notion of central bank independence.
Shelton argued that the challenges facing the Fed go far beyond short-term rate decisions, pointing to systemic issues within the institution itself. “We’re really looking at much deeper problems at the Federal Reserve, its models, its constructs, the way the Federal Reserve staff choreographs the meeting,” she said.
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She further emphasized the need for the Fed to be integrated into a broader economic and national security strategy. Shelton also challenged the long-standing defense of the Fed’s independence, calling it outright undemocratic.
“It violates the norms of democratic governance to have the head of a federal agency… who cannot be fired by anyone, by Congress, by the president, by anyone,” she says.
Highlighting the current dysfunction at the Fed, Shelton pointed to the operating losses the institution has incurred since September 2022, while highlighting the “over $900 billion in unrealized capital losses in its own portfolio.”
Among her strongest critiques involved the Fed’s policy of paying commercial banks to hold reserves rather than lend, which she says suppresses productive investment. “If you pay banks more to keep their money sitting risk-free at the Federal Reserve at a very hefty interest rate, that becomes a more lucrative use of their money than to make loans.”
The Federal Reserve did not immediately respond to Benzinga’s request for a comment on the matter. This story will be updated as soon as we receive a response.
Why It Matters: This comes amid growing speculations surrounding the ouster of Fed Chair Jerome Powell “for cause,” regarding a $2.5 billion headquarters renovation project.
Recently, Sen. Ted Cruz (R-Texas) made a push for abolishing interest on reserve balances (IORB) over a month ago, saying that it would save $2 trillion worth of deficits over the next decade.
Cruz’s push received the backing of senior economist Jeremy Siegel, who said, “This is not a trivial concern. The Fed’s shift from a profit-contributing institution to a deficit-expanding one may provoke greater scrutiny of its operating framework.”
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