A radical idea to solve inflation based on a radical choice by the former Fed

New York
CNN
—

Millions of Americans are frustrated because their dollars don’t go as far as they used to at the grocery store, rent or car insurance.

Judy Shelton, op controversial economist who has been floated by former President Donald Trump as a potential choice to lead the Federal Reserve if he wins November’s presidential election, has proposed a radical solution: the Fed should aim for no inflation at all.

Currently, the Fed aims for stable inflation, with prices rising slowly but steadily by just 2%. It has to happen so gradually that people barely notice it.

A zero percent inflation target might be popular, but it would represent a sharp deviation – one that mainstream economists warn would backfire.

“Stable inflation is an oxymoron because it means it is not stable,” Shelton recently told CNN.

Shelton, that Trump nominated in vain to the Federal Reserve Board in 2020, has long argued that a zero-inflation target would help ordinary Americans who are hurt when their paychecks can’t keep up with prices.

“Why don’t we just go to the extreme and make it zero and make life much less complicated for all of us who have to use the dollar and constantly have to express things in terms of adjusted inflation?” said Shelton, who has written a new book about money called “Good as Gold.”

Mainstream economists and Fed watchers, however, warn that a zero-inflation target at the Fed would be dangerous.

“I think it’s a bad idea. It’s misleading,” Mark Zandi, chief economist at Moody’s Analytics, told CNN.

The biggest concern of Zandi and others is that zero inflation is uncomfortably close to deflation, the environment of falling prices that is panicking economists and central bankers alike.

“Deflation was a defining feature of the Great Depression,” Zandi said, noting that falling prices made it nearly impossible for businesses and consumers to pay off their debts. “If history is any guide, you don’t want to go down that path. It never turned out well.”

While deflation may sound great to consumers (who doesn’t love discounts?), in practice, falling prices cause people to postpone buying things.

After all, why spend $300 on a grill today if you think it will be cheaper in a few weeks? And those delays could cause prices to drop further, causing even more delays. Rinse and repeat.

“Deflation can become a never-ending spiral — because there is no way for monetary policy to counteract it,” said Justin Wolfers, a University of Michigan economist who supports Vice President Kamala Harris.

One of the reasons the Fed has set its inflation target at 2% is that the Fed is safely outside the deflation danger zone.

Another reason: Research shows that official inflation measures are wrong – they may overestimate real inflation. And that means that the pursuit of zero could translate into deflation.

“It’s a bit like walking along the edge of a cliff. A zero inflation target would mean a borderline path. A 2% target means a few steps from the edge. That is safe, because if something goes wrong, you will not fall off the cliff,” says Wolfers.

Bill English, a professor at Yale University and a former top Fed official, said it can be difficult to escape deflation because the Fed eventually runs out of room to cut rates.

The Fed never cut rates below zero, even during the Great Recession.

“Policymakers want a buffer compared to the zero lower bound. Two percent is a reasonable number,” English said.

Shelton dismissed fears of deflation and its impact on consumer psychology.

“You can have a healthy economy with mild deflation, and I don’t think that affects people’s decisions,” Shelton said. “I think we have to trust supply and demand and let people respond to those price signals without feeling like we’re controlling their behavior.”

It is hardly the first controversial stance from Shelton, who has also called for a return to the gold standard and has attacked the Fed’s independence in the past.

But even some of Shelton’s biggest fans are against her embrace of a zero-inflation target.

Stephen Moore, a senior visiting fellow at the conservative Heritage Foundation, told CNN in a telephone interview that he has personally urged Trump to consider appointing Shelton to replace Fed Chairman Jerome Powell when his term ends in 2026.

Moore, who said he doubts Trump Powell would fire when instead he can just “wait for him,” adding that his Fed chairman wish list includes former Trump economist Kevin Hassett and former Reagan economist Arthur Laffer. He said Trump was receptive to all three names.

Still, even Moore said he disagrees with Shelton’s zero-inflation goal.

“My concern is that if you’re aiming for zero and you go negative, there’s deflation. And deflation is really bad,” Moore said. “I prefer too much inflation.”

Shelton was nominated by Trump to the Fed board in 2020 Moore withdrew from the battle.

Moore’s candidacy imploded after revelations from CNN’s KFile about disparaging comments he made about women. (He told CNN at the time that the comments were “a parody.”)

Moore told CNN he is not interested in jobs that require Senate confirmation, although he would be open to other roles, such as helping oversee the government efficiency commission that Elon Musk launched.

“The Senate confirmation process is brutal. I’m not going to experience that again,” Moore said.

For her part, Shelton dismissed speculation that she could be nominated to lead the Fed.

“I really haven’t thought about it…I haven’t put myself forward as a candidate at all,” Shelton told CNN, adding that she would recommend someone like Laffer or James Grant, founder of investment publication Grant’s Interest Rate Observer.

Shelton argued that more important than who will lead the Fed next is that the central bank adopt a new stance aimed at preserving Americans’ purchasing power.

“Where is the responsibility? No one has been laid off in recent years because of high inflation,” Shelton said.