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Yellen Says Policy Rule Would Undercut Fed Independence

Federal Reserve Chair Janet Yellen said legislation requiring the central bank to enunciate a rule guiding monetary policy would undermine the Fed’s independence.

Answering questions from the House Financial Services Committee, Yellen said “it would be a grave mistake for the Fed to commit to conduct monetary policy according to a mathematical rule. No central bank does that.”

While the legislation would allow the Fed to depart from such a rule if market conditions warranted, Yellen said the measure would still compromise the Fed’s independence.

Political scrutiny “would essentially undermine central bank independence in the conduct of monetary policy and I believe that global experience has shown that we have better macroeconomic performance when central banks are removed from short-term political pressure,” Yellen said.

The draft bill, announced on July 8, would require the policy-setting Federal Open Market Committee to describe a strategy or rule for changing interest rates.

While it has little chance of passing in a Senate controlled by Democrats, the bill signals Republican interest in a more constrained and transparent Fed as it closes one of the most expansive periods in its 100-year history. Policy makers have kept the benchmark interest rate near zero for five years and used bond purchases to hold down long-term borrowing costs, expanding their balance sheet to a record $4.38 trillion in the process.

The bill is sponsored by Republicans Bill Huizenga of Michigan, a vice chairman of the financial services subcommittee on monetary policy, and Scott Garrett of New Jersey, who earlier filed a bill that would require the Fed to disclose more about the supervision of the biggest, riskiest banks.

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