Millions of Americans are frustrated that their dollars aren’t going as far as they once did at the supermarket, on rent or on car insurance.
Judy Shelton, a controversial economist who has been floated as a potential pick by former President Donald Trump to lead the Federal Reserve if he wins the November presidential election, has proposed a radical solution: The Fed should aim for no inflation at all.
Currently, the Fed targets a stable inflation rate, where prices rise at a slow-but-steady pace of just 2%. It’s supposed to happen so gradually that people barely notice it.
A zero percent inflation target might be popular, but it would represent a sharp departure – one that mainstream economists warn would backfire.
“Stable inflation is an oxymoron because it means it’s not stable,” Shelton told CNN in a recent interview.
Shelton, whom Trump unsuccessfully nominated to the Federal Reserve Board in 2020, has long argued that a zero-inflation target would help everyday Americans who are hurt when their paychecks fail to keep up with prices.
“Why not just go all the way and make it zero and make life much less complicated for all of us who have to use the dollar and constantly express things in terms of inflation adjusted?” said Shelton, who has authored a new book about money titled “Good as Gold.”
However, mainstream economists and Fed watchers caution that a zero-inflation target at the Fed would be dangerous.
“I think it’s a bad idea. It’s misguided,” Mark Zandi, chief economist at Moody’s Analytics, told CNN.
The biggest concern voiced by Zandi and others is that zero inflation is uncomfortably close to deflation, the falling-price environment that freaks out economists and central bankers alike.
“Deflation was a defining feature of the Great Depression,” said Zandi, noting that falling prices made it nearly impossible for businesses and consumers to pay down debt. “If history is any guide, you don’t want to go down that path. It’s never worked out well.”
Although deflation might sound amazing to consumers (who doesn’t like discounts?), in practice falling prices cause people to delay buying stuff.
After all, why spend $300 on a grill today if you think it’ll be cheaper in a few weeks? And those delays can force prices to fall further, causing even more delays. Rinse and repeat.
“Deflation can become a spiral with no end – because there is no way for monetary policy to counter it,” said Justin Wolfers, a University of Michigan economist who has endorsed Vice President Kamala Harris.
In fact, one reason the Fed set its inflation target at 2% is because it’s safely away from that deflation-danger zone.
Another reason: Research suggests that official measures of inflation are wrong – they may overstate actual inflation. And that means targeting zero could translate to deflation.
“It’s a little bit like walking along the edge of a cliff. A zero inflation target would mean a path right on the edge. A 2% target means a few steps in from the edge. That’s safe because if something does go wrong, you won’t fall off the cliff,” Wolfers said.
Bill English, a Yale University professor and former top official at the Fed, said deflation can be hard to escape because eventually the Fed runs out of room to cut rates.
The Fed has never dropped rates below zero, not even during the Great Recession.
“Policymakers want a buffer relative to the zero lower bound. Two percent is a reasonable number,” English said.
Shelton dismissed the deflation fears and the impact on consumer psychology.
“You can have a healthy economy with some mild deflation, and I don’t think it affects people’s decisions,” Shelton said. “I think we need to trust supply and demand and let people respond to those price signals and not feel like we’re controlling their behavior.”
It’s hardly the first controversial position taken by Shelton, who has also called for a return to the gold standard and has in the past attacked the Fed’s independence.
“President Trump announced a Trump-Vance transition leadership group to initiate the process of preparing for what comes after the election. But formal discussions of who will serve in a second Trump Administration is premature,” Steven Cheung, Trump campaign communications director, said in a statement. “President Trump will choose the best people for his Cabinet to undo all the damage dangerously liberal Kamala Harris has done to our country.”
But even some of Shelton’s biggest fans are opposed to her embrace of a zero-inflation target.
Stephen Moore, a senior visiting fellow at the conservative Heritage Foundation, told CNN in a phone interview that he has privately urged Trump to consider appointing Shelton to replace Fed Chair Jerome Powell when his term expires in 2026.
Moore, who said he doubts Trump would fire Powell when he can just “wait him out” instead, added that his Fed chair wish list includes former Trump White House economist Kevin Hassett and former Reagan economist Arthur Laffer. He said Trump was receptive to all three names.
Yet even Moore said he disagrees with Shelton’s zero-inflation target.
“My worry is if you target zero, and you go negative, then you have deflation. And deflation is really bad,” Moore said. “I’d rather err on the side of too much inflation.”
Moore’s candidacy imploded following revelations by CNN’s KFile about disparaging comments he made about women. (He told CNN at the time the remarks were “a spoof.”)
“The Senate confirmation process is brutal. I am not going through 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 than who leads the Fed next, what’s most important is that the central bank adopts a new attitude focused on preserving Americans’ purchasing power.
“Where’s the accountability? No one got fired for the high inflation” in recent years, Shelton said.
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