WASHINGTON — Federal Reserve Chair Janet Yellen said Tuesday that legislation supported by House Republicans to make the Federal Reserve more transparent and accountable would be a "grave mistake" that could harm the U.S. economy.
Yellen said the proposal which could be voted on by the House this week is "significantly flawed" because it would require the Fed to use a mathematical rule in determining where to set interest rates. She said that approach is unworkable and would lead to "poor economic outcomes."
The measure is supported by Republicans who want to increase congressional oversight of the Fed but is strongly opposed by Democrats.
"The bill would severely impair the Federal Reserve's ability to carry out its congressional mandate and would be a grave mistake, detrimental to the economy and the American people," Yellen wrote in a letter to House Speaker Paul Ryan, R-Wisconsin, and Minority Leader Nancy Pelosi, D-California.
But House Financial Services Committee Chairman Jeb Hensarling, R-Texas, said the measure known as the Fed Oversight Reform and Modernization (FORM) Act was needed to deal with the enhanced powers the Fed has used to respond to the 2008 financial crisis and the deep recession that followed.
"While the Fed's unusual monetary activities and power have increased, there has regrettably been no corresponding increase in its transparency and accountability," Hensarling said in reaction to Yellen's letter.
The bill won approval by the House Financial Services Committee on July 29 on a party-line vote of 33-25. The House majority leader's office has announced it is on the schedule for a vote by the full House this week.
The measure would require the Fed to use a formula to set interest rates but would allow the central bank to deviate from that strategy if economic conditions warranted a change.
The Fed's chosen formula would be subject to a review by the Government Accountability Office, the auditing arm of Congress, and the GAO would also be required to audit the Fed any time the central bank chose to make changes to its rule.
Yellen said had the Fed been required to comply with a policy rule over the past seven years when its key rate has been at a record low near zero, the unemployment rate would have been "substantially more painful than it already was" and inflation would be even farther from the Fed's 2 per cent goal.
"Millions of American would have suffered unnecessary spells of joblessness over this period, generating enormous amounts of personal and collective damage that could have been avoided — and, in fact, was avoided because we had the latitude to use our available tools responsibly and forcefully," she said.
The GOP legislation would also require the Fed to be more transparent about the stress tests it requires the country's biggest banks to pass each year. It would also place new restrictions on the Fed's ability to make emergency loans during periods of financial crisis.
Martin Crutsinger, The Associated Press