Trump's Federal Reserve chair nominee Judy Shelton proposed setting the inflation target at zero, believing this would help ordinary Americans cope with rising prices. However, mainstream economists warn that zero inflation could lead to deflation, which could have severe impacts on the economy. Mark Zandi, chief economist at Moody's Analytics, stated that deflation makes it difficult for businesses and consumers to repay debts and has historically led to the Great Depression
Millions of Americans are complaining that their money spent on groceries, rent, or car insurance no longer has the purchasing power it once did.
Controversial economist Judy Shelton has proposed a radical solution: the Federal Reserve should aim for zero inflation. If former President Trump wins the presidential election in November, Shelton may be nominated as the chair of the Federal Reserve.
Currently, the Federal Reserve's goal is a stable inflation rate, meaning prices rise at a slow but steady rate of just 2%.
A zero inflation target may be popular, but it would represent a sharp departure. Mainstream economists warn that doing so would be counterproductive.
"Stable inflation is a contradictory term because it implies instability," Shelton told CNN in a recent interview.
Shelton was nominated by Trump to the Federal Reserve Board in 2020 but was unsuccessful. She has long believed that a zero inflation target would help ordinary Americans who are hurt by wages not keeping up with prices.
"Why not just change it (the inflation target) to zero, making life less complicated for those of us who have to use dollars and constantly express things in inflation-adjusted terms?" Shelton said, as she wrote a new book about money titled "Good as Gold."
However, mainstream economists and Federal Reserve watchers warn that setting the inflation target to zero would be dangerous.
Mark Zandi, chief economist at Moody's Analytics, told CNN, "I think it's a bad idea. It's misleading."
The biggest concern expressed by Zandi and others is that zero inflation is uncomfortably close to deflation, an environment of falling prices that makes both economists and central bank officials uneasy.
"Deflation is a hallmark of the Great Depression," Zandi said, noting that falling prices make it nearly impossible for businesses and consumers to pay off debts. "If history is any guide, you definitely don't want to go down that road. It's a road with no good ending."
Deflation is a "Never-Ending Spiral"
While deflation may sound appealing to consumers (who doesn't like a discount?), in reality, falling prices lead people to delay purchases.
After all, if you think a grill will be cheaper in a few weeks, why spend $300 on it today? These delays force prices to fall further, leading to more delayed purchases, creating a vicious cycle.
Justin Wolfers, an economist at the University of Michigan who supports Vice President Harris, said, "Deflation can turn into a never-ending spiral—because monetary policy has no way to combat it."
In fact, one reason the Federal Reserve sets its inflation target at 2% is that it safely distances itself from the danger zone of deflation Another reason is: research shows that the official measures of inflation are flawed—they may overstate the actual inflation rate. This means that targeting zero could translate into deflation.
Wolfe said, "It's a bit like walking along the edge of a cliff. A zero inflation target would mean a path that walks on the edge of a cliff. A 2% target means you're still a few steps away from the cliff. That's safe because if something goes wrong, you won't immediately fall off the cliff."
Bill English, a professor at Yale University and former senior official at the Federal Reserve, stated that deflation may be hard to avoid because eventually the Fed will run out of room to cut rates.
The Fed has never lowered interest rates below zero, even during the Great Recession.
"Policymakers want an inflation buffer that matches the zero lower bound on interest rates. 2% is a reasonable number," English said.
Shelton is dismissive of deflation and its impact on consumer psychology.
Shelton said, "You can have a healthy economy with moderate deflation, and I don't think it will affect people's decision-making. I think we need to trust supply and demand and let people respond to those price signals rather than feel like we are controlling their behavior."
Trump advisors favor Shelton but oppose zero inflation target
This is not the first controversial stance taken by Shelton; she has also called for a return to the gold standard and has previously attacked the independence of the Federal Reserve.
"President Trump has announced the formation of the Trump-Vance Transition Leadership Team to prepare for post-election matters. However, it is too early for formal discussions about who will serve in a second Trump term," said Steven Cheung, communications director for the Trump campaign, in a statement. "Trump will choose the most suitable candidates for his cabinet to eliminate all the damage caused to our country by the dangerous liberal Harris."
But even some of Shelton's biggest fans oppose her acceptance of a zero inflation target.
Stephen Moore, a senior fellow at the conservative Heritage Foundation, said in an interview with CNN that he privately urged Trump to consider appointing Shelton to succeed Fed Chair Powell when his term ends in 2026.
Moore expressed skepticism that Trump would fire Powell, as he could "wait for him to leave," adding that besides Shelton, his list of candidates for Fed chair includes former White House economist Kevin Hassett and former Reagan administration economist Arthur Laffer. He said Trump is open to all three candidates.
However, even Moore stated that he disagrees with Shelton's zero inflation target.
"What I worry about is if the inflation target is zero and then turns negative, then you have deflation. Deflation is really bad," Moore said. "I would rather make the mistake of inflation." Sheldon was nominated by Trump to the Federal Reserve Board in 2020 after Moore withdrew from the competition.
His candidacy collapsed after CNN's KFile revealed derogatory comments Moore made about women. (He told CNN at the time that the comments were "a joke.")
Moore told CNN that he is not interested in any position that requires Senate confirmation, although he is open to other roles, such as helping oversee the government efficiency committee established by Elon Musk.
"The Senate confirmation process is brutal. I won't go through that again," Moore said.
"The Federal Reserve should be held accountable"
As for Sheldon, she denied speculation that she might be nominated as the chair of the Federal Reserve.
In an interview with CNN, Sheldon stated, "I really haven't thought about it... I don't see myself as a candidate at all." She added that she would recommend someone like Arthur Laffer or James Grant, the founder of the investment publication Grant's Interest Rate Observer.
Sheldon believes that the most important thing is not who leads the Federal Reserve, but that the Federal Reserve adopts a new attitude focused on maintaining the purchasing power of Americans.
"Where is the accountability? No one has been fired for high inflation in recent years," Sheldon said