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The White House is said to be vetting Judy Shelton for a seat on the Fed. She told us what she would bring to a central bank whose policies she has long criticized.

Business Insider | Jun 9, 2019, 03.45AM IST

Judy Shelton

CNBC

  • The White House is vetting former Trump adviser Judy Shelton for nomination to the Federal Reserve Board of Governors, according to ?
  • The potential nominee has been critical of the central bank and would like to change some of the core ways it operates.
  • In an interview with Markets Insider, she said she thought it would be "superficial" to solely answer yes or no to whether the central bank was independent, outlined a zero-percent inflation target, and expressed support for the president and his policies.

The White House is said to be vetting Judy Shelton, a former campaign adviser to President Donald Trump, for a top policymaking position at the Federal Reserve.

The New York Times and Bloomberg reported in May that Shelton is being vetted for the position, and she told Markets Insider she has been contacted by the Office of Presidential Personnel.

In an interview with Markets Insider, Shelton laid out what she would bring to a central bank whose policies she has long been critical of.

The conservative economist said she thought it would be "superficial" to answer yes or no to whether the central bank was independent, said she wanted a zero-percent inflation target, and expressed support for the president and his policies.

Shelton currently serves as the US director for the European Bank for Reconstruction and Development.

This interview took place on June 6, 2019. You can read the full interview transcript, edited for brevity and clarity, below. You can click here for articles on the following points from the conversation:

Full interview:

Gina Heeb: Where exactly are you in the run-up to the - I know you haven't formally been nominated - but I have seen reports that you're being vetted and then I've also seen reports that it's not a sure thing. If you could speak to that.

Judy Shelton: I really can't speak to it. I met with people from the Office of Presidential Personnel. And so, I assume I'm being considered. I'm also reading that I'm being considered.

What I appreciate is that I think that the whole issue is an interesting one and deserves a lot of attention at a time when the Fed itself seems to be asking questions about our models working or are mechanisms delivering the best economic performance potential. Because it's not that the Fed creates economic growth, but I think it's an important part of having the conditions out there that make it possible to generate a productive economic growth. They're all really important issues.

I also think because we do live in an economy where international trade is very important, the central banks do affect exchange rates. I think it's an it's an interesting time even from an intellectual framework point of view to say, how do you have something that is coherent? How do you integrate domestic and international monetary policy so that you have the appropriate level playing field for free trade?

I like that because my name is out there people are more interested - pro or against - but the point is we're talking about these things. I'm very pleased about that. And we'll just have to see what happens if anything goes any further for me.

Heeb: Could you tell me a little bit about your relationship with President Trump?

Shelton: I was actually an adviser to Ben Carson during the primary. Just on issues that would come up on the Federal Reserve. But he really wasn't asked enough about it during the debate. I wasn't able to really have much of an impact I don't think. And then when he went with Donald Trump I was very happy. Because one thing I really liked about what Donald Trump was bringing up as a candidate was the issue of currency manipulation. Here I am, someone who thought that this had been ignored for decades, and here was someone at the presidential candidate level who was willing to say that he believed in free trade, but that currency manipulation was an unfair trade tactic. And I thought, finally we're going to address this.

I think early on - maybe it was in July or August of 2016 - I wrote something for the Wall Street Journal on Trump's contribution to sound money. Because to me, again, that's an entrée into this whole issue of what is the importance of money and having monetary clarity to transmit price signals if you want to take a free market approach? And for me that's all kind of what I would call the sound money thinking that interests me very much.

At right about that same time, I had a note from Steven Mnuchin saying, would you be willing to have your name as part of the Trump economic advisory council? I was pleased to be part of that group. I've known Larry Kudlow and respected him very much for a long time. I've known Steven Moore for a long time. Likewise, their idea of productive economic growth and the necessary aspects of it, I'm aligned with them to a large extent. I was happy they wanted to include me.

And then within a month of that, I went out to one of the rallies and met Trump as he was a candidate and he was traveling with Mike Pence. I sat with him and his wife and attended the rally and met members of the team. They were all there that day and then were sending memos back and forth to members of the economic team, just with ideas.

And then I guess a few weeks before the election David Malpass, who was very much involved with the Trump economic team, asked if I would serve on the transition team. I was thrilled to do that. And then when Trump won, we jumped into action and I was the lead adviser for international affairs at the Treasury. And that was the landing team that we had during the transition. That was a wonderful experience. And I guess that was about three months because it actually included preparing papers and studies and recommendations for the incoming Treasury secretary and kind of overseeing the area that - David Malpass was slated to become the undersecretary of international affairs - so preparing positions in conjunction with David. And then also briefing Secretary Mnuchin through his confirmation hearing and shortly after that.

But then I really wasn't looking for a position. I loved the experience during transition, but I wasn't seeking a position. I just kind of said, great, thank you very much, and I was looking forward to seeing things unfold. It was several months later, it was well into the summer of 2017, that David Malpass at Treasury asked if I would be interested in serving in this particular position. And there's a lot at the European Bank for Reconstruction and Development.

Heeb: Right. Well, it sounds like you've had a busy few years and developed close relationships within the administration and with the president. Would those change if you were nominated to the Fed?

Shelton: Well, how do you mean? I mean, I guess you don't give up friendships. But you mean like, would I take orders or something? I don't know [what you mean]. I think the people who are already there are especially aware of what are the appropriate boundaries. And anyone who knows me knows I'm pretty consistent in my own person. I guess I don't know how else further to answer. But I think that when you can work with people and you're like-minded ... But obviously the Fed is independent and I know everyone respects that. I wouldn't see any conflicts. At the same time, I don't think that you put up artificial barriers or change your feelings of respect or friendship for people.

Heeb: What about Larry Kudlow? I know you mentioned a close relationship with him. Would you guys discuss monetary policy?

Shelton: When I say close friends, I've just known him a really, really long time. We don't really get together socially or anything and I always took it as a professional task. We would write memos. He would just say, what are your thoughts on this or that issue, if it involved more international monetary issues. I would write, with great seriousness, memos. But I would say in more of a professional - not even arm's length - except that I know generally how he might feel about something and he probably knows generally how I feel.

The only thing he's ever said to me when we talked about whether I could throw my hat in the ring for this was, I said something that, while working in my current position I had really refrained from commenting. I had been writing op-eds. I used to write more often for the Wall Street Journal about exchange rate issues or monetary issues, but I felt like since the Treasury - I didn't work for Treasury but it involved a relationship with Treasury - I didn't know what was appropriate to say. I don't really like feeling like I can't write things because I don't want to violate ... I think Treasury respects the Fed and vice versa.

And he said, well, one thing. You would be free to say what you want if you were in line for the Fed. And I remember saying, really? Don't governors have to be careful what they say in speeches and such? And he says, not that I know of. He said, I think people write what they think. And I thought, well, that sounds liberating actually. But I have no sense that I have any special in or I don't know if I'm even on a short list to tell you the truth. I just think he was talking generally. That I agree to say what I think, so that's always very appealing.

Heeb: Do you worry that expressing support for fiscal policies could make people skeptical of the central bank's independence?

Shelton: I haven't really thought about that because I wouldn't be responding to ... I don't know why the Fed is ... I don't know. I haven't really thought about it. I saw people trying to make something of if somebody wanted to meet for coffee and talk with me. For me the easiest, most convenient place was at the Trump Hotel. And I saw people say, oh, oh, she's trying to promote that. I thought no, it's a block or two from Treasury and they leave you alone and you can have a cup of coffee and sit there and no one bothers you and there's not loud music that drives you out. So anyway, I don't know.

Heeb: I just came across a photo of you the other day at Trump Hotel. I was going to ask if you frequent there.

Shelton: When I come into DC, if I'm in the US, I basically live on an old farm. A very old property, and it's almost two hours away by train. So for me, it's easy to then get into DC and I don't have an office there. I can't bring reporters into the Treasury. My office is back in London. And so I have to meet at some hotel or coffee shop. And that one happens to be very convenient because I'm usually going to Treasury or State or NSC or the visits that are involved with my work at EBRD.

After I met with James Politi in London, he said, can I take your photo? I thought well, okay. And then I saw people say, oh, she's promoting that. I don't see any conflict whatsoever. Isn't it regular - and maybe you know better than I do - isn't it regular practice for the Treasury secretary to meet with people at the Fed, to meet with Chairman Powell? I believe so.

Heeb: That's definitely normal. They usually issue a readout and as long as everything's transparent, it's normal. I'm more so asking about these close relationships, as opposed to a formal meeting, because you already have these friendships within the administration.

Shelton: When I say close, I don't know what people are thinking. I mean, I don't go out and play golf with anyone. I don't. I'm kind of a hermit. I'm not very socially active. I don't mean close. I don't even mean picking up the phone or even emailing. I don't even do that now really. That was really during the campaign and just on maybe three or four issues related to the economic agendas going forward. What do we think about this or what do we think about that? Just things that were circulated on the team. It's just that I've known Larry Kudlow since I think early 90's. I would say it's more of a long-term respect for him as a person. I just think he's great, but we're not what I would call social friends. Only because I'm not socially ... As I say, we live on a farm, and I'm kind of a hermit.

Heeb: To sum it up, you wouldn't allow these relationships - close or not - to influence your decisions as a Fed board member?

Shelton: No.

Heeb: Do you think that central bank independence in general has been challenged by the president? He repeatedly comments on the job the Fed is doing, he pressures them to lower interest rates, and even reportedly wanted to fire Chairman Jay Powell.

Shelton: I would say that that's one of those things where people say, oh the the independence of the Federal Reserve. If you get on the Federal Reserve website, it is an agency of the US government. Right away then you say okay, but they're very independent. I think some of the practices are - I'm not saying what I believe necessarily - I'm just saying let's look at the reality of sort of the sacrosanct idea that they're so independent.

The Federal Reserve purchases the debt issued by the government, issued by another agency of government, the Treasury. Then the Federal Reserve, as another independent federal agency of government, purchases that debt, collects the interest off that debt, pays for its own ... and at one time was purchasing 60 percent of the debt being issued by the Treasury during the crisis years. Then it takes the interest off that portfolio that the Treasury is paying to the holder of the debt, another agency of government, and lives off that. I mean takes its own administrative expenses out of that amount, the interest on the government debt it's holding. Then it remits the rest of that back to the Treasury and we call that revenues to the federal budget. Now, that I think is a bit fiscally incestuous.

Then I think okay, so not so independent in a way. And as you just mentioned to me, it's not unusual at all for Treasury officials to meet with the head of the Fed. I think it's healthier to be transparent. I would rather have a president who says what he thinks about the policies out loud for everyone to hear, instead of these little subtle meetings we're now learning about historically. As to whether Nixon said this or that to Arthur Burns or intimidated or put pressure on in these supposed behind-the-scenes attempts to intimidate. I think Paul Volcker has referred to words from Secretary Baker. I don't know that those took place, but I can well imagine. And I would much rather have someone if the goal is to be transparent. Then instead of people sort of doing the signaling that oh, how dare they, why not just be open about it?

And I think it's even sillier people who then say, oh now the Fed wanted to lower rates, but now they can't because it will look like the president intimidated them. I mean that was kindergarten to talk about these things. I think everybody's professional and everyone should feel free to talk about things. I don't think they're intimidated by what is said at the presidential level. I think we should be happy that someone is savvy enough about the role of interest rates and the role of the Federal Reserve to have an opinion.

Heeb: So, you're saying that the Fed is not currently a completely independent institution? Am I getting that right?

Shelton: I'm just saying that people are human and they absorb tons of information. And I presume we choose people who are capable of executing their best independent judgment in the interest of the responsibility to which they have pledged their fealty and their capabilities to uphold. I'm not appalled at the notion that the president can have an opinion about financial markets or about monetary policy. I think that the chairman of the Fed is fully capable of handling it, of taking into consideration whatever advice he deems appropriate from whatever sources he deems appropriate. And he is his own person and intellectually secure and will do what he thinks is the best thing to do. I think people harumph a lot about this without saying everyone's doing their best job. Let's give them credit.

Heeb: Do you think the Fed is currently a completely independent institution?

Shelton: I think I've answered that.

Heeb: What was your answer? Sorry, it wasn't clear to me.

Shelton: Is the Fed a completely independent institution? I mean, isn't that what you just asked me a moment ago?

Heeb: I wasn't clear on whether your answer was yes or no.

Shelton: Well, I think it would be a little bit superficial to say yes or no. The Fed itself calls itself an agency of government, an independent agency. But as I think I just walked you through, the Fed purchases the debt issued by Treasury and takes the interest from that and then remits that back to the Treasury as revenues to the federal budget. I think at one point when it was really over a hundred billion that it was remitting under Bernanke, he even said with some pride that we are one of the larger revenue centers for the federal budget. And I think they were about the sixth-largest contributor to the federal budget that year. So, not independent fiscally. Just looking at the financial income statement for a consolidated government.

Heeb: But is it independent from political influences? That's more so what I'm asking.

Shelton: Well, I think that the Federal Reserve has to be aware of economic slash political developments at any given moment because there's a lot of interaction there. And I think the Fed has to take prudent consideration of what is happening politically and economically. And I hope they don't have blinders on.

Heeb: But I mean for political motives or -

Shelton: Hey, Gina. I'm assuming that you're just being a straight shooter with me as I'm trying to be with you. So, if there's another answer you're looking for...

Heeb:No. Just a yes or no would be fine.

Shelton: Well, okay. Anything else?

Heeb: I was just seeing if you'd be able to answer it in a yes or a no.

Shelton: Well, I really think I've overkilled on that. I see we've almost done 30 minutes. So, give me your next legitimate question.

Heeb: I think that was a legitimate question. So, I'm just going to say you didn't want to answer yes or no on that?

Shelton: Wow. Well, okay, I'm sorry. I don't know why I thought this would be a good conversation. [MUFFLED] Could you give my answer, which I think was more that it would be superficial to try to say yes or no to is the Fed an independent agency? And then sort of give my enlarged answer in terms of the intermingling, with the relationship between Treasury and the Fed.

Heeb: I think we're saying the same thing in a different way. You're saying you think it would be superficial to say yes or no. And I was just saying that you weren't saying yes or no.

Shelton: That's a hot-button issue. It's the kind where people will say, oh, she doesn't believe in the independence of the Federal Reserve. So then, it will take a longer answer. Whereas I suppose, it's easy to say no, it's 100 percent independent and they should never even talk to each other. That it should be more strict and I don't think they should be allowed to read newspapers. You could say that. But I don't think that's realistic.

I would say my most true answer in my opinion is that you choose professional people, they rise to the position and they have integrity, and they don't wear blinders. But they always choose what they think is the best way to fulfill their responsibilities. And I just think you give responsible people the benefit of the doubt that they are not unduly influenced, that the primary goal of their service is to conduct it responsibly. I don't think people are intimidated or they wouldn't be in that position.

Heeb: Okay. Well, we can move on here. I recently read that you were against the Fed's dual mandate. There have been growing debates about how inflation should be measured, even at these conferences in Chicago this week. What do you think the Fed's mandate should be and what yardsticks should be used for measurement?

Shelton: On the dual mandate, it's another one of those concepts that has taken on sacrosanct importance. I wonder how much people really go back and read that legislation, the Humphrey-Hawkins legislation from 42 years ago. And that was a time when I think there was a certain amount of hubris. Those are the Phillips curve days, the idea that government could fine tune economic performance and could chart it. There was an overemphasis on econometrics in the quantitative approach to running the economy and controlling it. That you had this perfect trade off between unemployment and inflation. The mandate just said maximizing employment. Okay. So, I don't know if that's the Fed's job or how you then define it. We're certainly at minimal unemployment right now - a 50-year low or 49-year low.

Stable prices? Stable usually means no movement. If that is the sacrosanct mandate then we get back into really interesting ... If you go back and look at the transcripts when Janet Yellen and Alan Greenspan were talking about why 2 percent versus 0 percent. What is stable? I mean if it's a value of a house and you have 2 percent inflation for 10 years, 20 years, that means the price changes what 20 to 40 percent during your ownership of your house. Is that still relevant? Is 2 percent right? Is it good to sort of incentivize people? I think that was the argument that Yellen made. Again, the transcripts I really recommend. They're fascinating to read because she convinced Alan Greenspan and he was probably more a zero change in prices guy, a zero delta guy. And she made a good case basically to say workers want to see a nominal increase in their wages. It's very Keynesian, that ultimately money illusion. Even though you're not any wealthier, if all prices go up two percent there's still an incentive. If there are sticky wages downward, nobody wants to have flat income or negative. So, you build in this little cushion that makes it look like you're getting ahead. That's more economics as a social science. And I think she got a lot of that from her husband. It's very well-known in that field. So, those are interesting arguments.

But to just say the Fed's mandate is stable prices and not comment about why the 2 percent or some people are four percent or even six percent to give the Fed more room to maneuver. Those are interesting questions not answered by that quote dual mandate.

And then to me, it's actually a triple mandate that people seem to forget. The third element is in the same sentence. It was the maximum employment, price stability and moderate long-term interest rates. What happened to that? We have the 10-year now lower than the 3-month. What happened to moderate long-term interest rates? That disappeared when the Fed became much more activist following 2008. I don't understand why people call it the dual mandate and then they don't bring up that it was actually three things.

You could say from a saver's point of view that not being compensated for retirement when you're - as Trump used to say during the campaign - people who have done all the right things to put money in savings accounts are getting creamed. That was his word. But I thought he was absolutely right about that. Maybe low rates are good for developers, but they sure don't give adequate compensation to people who are saving to put away for retirement in a responsible way. I wish the Fed would have been more concerned about the third and, for no reason less important, aspect of the mandate. It was a triple mandate.

Heeb: Okay. I have a few questions if we could just back up a little bit as far as maximum employment. You said you don't know if that's the Fed's job. You would be against that as a congressionally-mandated task for the Fed?

Shelton: Well, what do they mean by that? Because what was the Fed doing differently when we had high unemployment a few years before? And then when the Trump administration came in and we got some other things going like reducing the regulatory burden and I think a better environment from a tax point of view for business and entrepreneurship. I think people are starting to see potential movement and getting an improved trade reform set of policies in place. Now, we have low unemployment. But the Fed was the same Fed during all of that. And if people are saying the Fed should maximize employment, will you do that by lowering rates or raising rates?

I find people start arguing without knowing what they really want the Fed to do. Are negative rates good for employment? Is that what people mean when they say the Fed should maximize employment? Does that always mean they should lower the interest rate? Because I think some labor groups had thought that but maybe now they're reconsidering.

To me, the only thing that really matters from a jobs point of view is getting productive economic growth. You don't just want the Fed to do things that are good for investors who arbitrage differential interest rates or who speculate on currencies. You want to see what we're starting to get which is increased productivity, which then justifies the increased wages. Those are things that I think have more to do with other policies that the government can be involved with, including infrastructure. I don't think the Fed can create that. I don't think just by raising or lowering interest rates, you can you can create productive jobs. So, I would just leave it at that.

Heeb: So, the mandate should be productivity growth?

Shelton: I do think stable money is very important. I think you'll find many central banks that's their only mandate - monetary stability. You could say that, and that's not very controversial.

But I just think that there are other factors, including people's confidence about economic growth.

You could look at Fed policies now on paying interest on excess reserves. Does that or does that not disincentivize banks to make loans? It's the loans to small businesses or consumer loans or mortgages. The kind of community bank loans that I think help to create jobs. So, the Fed is a factor. But there, it might not be the rate of the interest. It's whether banks decide that it's easier to leave the money sitting at the Fed and collecting interest for doing nothing or to actively seek risky loans by definition - the kind of loans that create more small businesses and lead to more employment. I would say I want the Fed's actions not to discourage employment. Just by raising or lowering rates, if that's all the Fed can do. That's why I'm looking at mechanisms for how they do it, not just whether they're going up or down.

I think you had written something saying that I'm in favor of zero interest rates or near zero. I'm not commenting. I try to go out of my way to say, I don't know what the interest rate should be. I don't think anyone does. I think that's the whole issue of you have a central bank thinking that it's smarter than the free market in terms of what the interest rates should be based on the supply of loanable funds and the demand for loanable funds. I'm not saying what it should be. What I'm talking about is a mechanism that rewards banks and pays them 2.35 percent interest for doing nothing. I think that is not good for employment.

Heeb: Would you instead use manipulating the balance sheet as opposed to these? It sounds like you want to eliminate the interest rate on excess reserves.

Shelton: That's the primary way that they raise and lower the interest rate. That was meant to be an emergency measure. At the time, everyone, including Ben Bernanke, thought that if you inject all this liquidity into the system in the wake of the meltdown in 2008 that that was an assumption that if you increase base money and we have the normal multiplier effect that you're looking at excessive inflation down the road. And so Bernanke wanted to move up the timetable for paying interest on excess reserves to lock up those reserves. Because then he said with all these people saying, what about inflation down the line if you're going to have all of this quantitative easing? He said, I can stop inflation in 15 minutes. That's because all you would have to do is keep raising it to the level where banks would say, why should I make any loans? I mean, what if I could get 10 percent from the Fed?

The point is that became a way to prevent the inflation that everyone expected. When we didn't get the inflation, that's when I think the Fed should have been saying, why is that the dog that's not barking? Why aren't we seeing an increase in the CPI? Because the goal of pumping the money in was to make it easy for companies with this low cost of capital to invest in expanded plant and equipment and then to hire people so then that would start helping. That was the idea, that you would be hiring these people and you'd be paying them because now you had expanded production capabilities. That their aggregate level of wages gave them increased purchasing power and that would have put pressure on the CPI and you would have seen the inflation.

So, when we didn't see that after so many years, I think we should have said it was a reasonable experiment maybe by the Fed. But where is that money going? And maybe it's not doing what we thought. Instead of buying or investing in expansion, maybe companies were buying back their own shares to a larger degree than anyone would have thought. And maybe already wealthy investors are getting access to margin accounts at near zero rates where they can invest in the market. And maybe governments had the opportunity to borrow big time at low rates and lock in low rates. Those were the unanticipated consequences where I think then the Fed should have said that maybe the model isn't working the way we thought.

Heeb: You mentioned that no one knows what the interest rate should be -

Shelton: Instead of saying no one knows, I'm just saying that having studied the Soviet economy, I think we had the experiment that was showing what works better: central planning or market mechanisms. And I'm saying market mechanisms give you better outcomes. In a sense, by having a committee of people decide what the interest rate should be, that's a closer model to central planning than having the free market find the interest rate that is appropriate for the cost of capital. That's what we're pricing in the market, the cost of capital, and that's the interest rate. I'm just saying there are people who have funds they could lend and there are people who could use funds because they see productive investment opportunities. And normally banks would be the financial intermediaries that charge the interest rate that allows them to connect the source to the use, hopefully in the most productive way. Because they're good at judging risk and return, and that's why we have banks.

Heeb: I'm going back a few questions because I forgot to ask a follow-up here. You mentioned the two percent inflation target. You said some people want four or six percent. Do you have a target?

Shelton: My sense would be genuine price stability is really... I mean my ideal would be zero. Stable prices mean stable.

Heeb: So, zero percent inflation?

Shelton: Well, yeah. Price stability means stability. I'm not saying the CPI measures everything. I'm not saying the PCE measures everything. What would you really want to do is, the level of money and credit in an economy is calibrated to stable consistent price signals that are conveyed through time. That would be the ideal.

Heeb: You said in a Financial Times interview the Fed has a "Soviet" style power over markets. As a board member, you would get just one vote and the framework would be largely the same as it is now. So, why do you want to be part of that?

Shelton: I don't think I want to answer that. I think it would be presumptuous. But I think it's good to have fresh thinking and to challenge. It's hard to do. I mean I will say that within the current structure, I don't believe in just pulling the rug out from people and coming in and trying to blow it all up. I think consistency and moving toward a better place. I would want to be having the conversations, asking the Fed. And I'm very pleased to see the Fed is already doing this, going through self-evaluation. Is the Federal Reserve functioning in a way that is setting up optimal conditions for productive economic growth?

I would start by looking just very generally. We see around the world I think we're up to 11 trillion in securities that ... or have a negative interest rate. And I think that situation has been largely engineered by central banks. I think we have to say, what is the role of central banks in a productive economy? And are they helping or hurting? I think it's legitimate to say, are they too dominant or does it turn out that they only serve a small segment of the private sector? And what is their interaction with governments and what is their impact on currency? Those are all the questions we should be talking about at a very basic level. I'm happy for the new open debate on all of these issues.

Heeb: What do you think of the Fed saying it's ready to act if trade conditions worsen? A lot of people saw that as a signal that they could lower rates.

Shelton: I think the market is a little bit Kabuki theater and over responds in both directions to comments. The Fed doesn't wear blinders and is watching developments, economic and political, all the time, as it should. That was kind of just an obvious statement, but I think the market grasps at clippings and overreacts for better or worse.

Heeb: But what about the actual policy move to make that statement? Does that signal that tariffs are hurting the American economy or have the potential to?

Shelton: What we're going through on all of that has more to do with negotiating toward a better overall trading platform, more of a level playing field. I see that as necessary and especially with China. That had been neglected for too long, and I think in the end we'll end up in a good place.

Heeb: What is necessary? The tariffs or the Fed response?

Shelton: I think it's appropriate on trade to use the levers that you have to work with your trade partners, especially in these bilateral agreements. I think that we needed to confront China and and work out a better relationship that's more equitable with more access to their markets. That's just one factor in the economic outlook that the Fed takes into consideration.

Heeb: Are there any conditions that would call for tightening monetary policy?

Shelton: I think just the classic ones. The Fed is now saying that they are willing to overshoot the two percent target because they were undershooting for so long. I would think that at some point we would be using - if we're doing a path to phase out of paying banks on excess reserves. Because I think that's going to be challenged that whole practice. Then the Fed still has 3.6 trillion in its portfolio that it can interact. But then that's going to these other questions of should the Fed be trying to engineer an artificial interest rate? I think that's when you cause distortions.

Heeb: You support the gold standard, but I haven't seen a lot of details about how it would be implemented.

Shelton: First of all, whenever you see that, please, please try to figure out what do people mean when they attribute that to me. Do they mean a gold standard where… We only have 261 million ounces, so I don't understand. Do people really think that I'm saying that somehow about 300 or 350 billion or so - I'd have to calculate it out -- but not a big chunk. Is that what they're talking about or are they talking about where during like the classical international standard? I mean the government didn't stand ready to convert. All they did is look at what Thomas Jefferson wrote on the establishment of a money unit. The United States you just declare, what is your measurement? What do we call the US dollar? He did it as so many grains of silver or so many grains of gold. And you just define it. Bretton Woods was something completely different where only a foreign central bank had the right to convert dollars into gold.

I'm not sure what people mean when they attribute that to me or what they think I'm suggesting. What I said is that it's a good way to look at the virtues of what you want your monetary system to provide, in terms of a monetary integrity or price signal clarity or international system of sorts that sovereign countries can voluntarily agree to abide by. What do you want and do you have a universal reference or benchmark? So that other countries could voluntarily agree to abide by certain rules on currency relationships. It doesn't have to be gold. Gold is the cliche. But if someone wants to suggest something different, I've heard people say sand or water or oil. I just haven't seen anything better than gold.

Heeb: You're not in favor of pegging a currency to the price of gold?

Shelton: When you say pegging, what do you mean by that? What are you asking me?

Heeb: When a currency is defined in terms of -

Shelton: I'm sure I've never said that the Fed should have a price rule to ratchet up or down interest rates in accordance with the daily price of gold. But I'm sure that if anything I would have said a price rule I don't think is a good idea. I've never suggested that. I'm not badmouthing the gold standard. I'm saying look to see what you like about prior systems that have worked and see if we could develop a future system that would incorporate the virtues of things that worked in the past.

Heeb: But you haven't favored a system in which the value of a currency is defined in terms of the price of gold?

Shelton: I'm just saying that it's way too easy to toss out the term. When the government overspends you could say, oh we should just have a gold standard. Because then you have some discipline because then there's kind of a fiscal price to pay. You could lose gold and then that shrinks your money supply and then that puts the brakes on if you're overinflating or whatever you're doing wrong. I mean there's lots of aspects to it, but you really have to be careful about what you mean to just say, oh, you favor the gold standard.

I would just say if you're talking about the classical International gold standard like Alan Greenspan, like Robert Mundell, the Nobel Prize winner, I recognize the virtues of when we had an international voluntary currency system that honored the sovereignty of countries and that was based on their own self-discipline and not say like we have problems with the euro because if one country kind of blows it - whether it's Greece or Italy or Portugal - it doesn't threaten the whole system. Those are those are things we should be talking about.

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