Yellen, White House Step Up Opposition to Fed Oversight Bill

Janet Yellen Testifies Before The House Financial Services Committee

Janet Yellen, chair of the U.S. Federal Reserve, speaks during a House Financial Services Committee hearing in Washington, D.C., on Nov. 4, 2015.

Photographer: Andrew Harrer/Bloomberg
  • Fed chair says legislation would politicize short-term policy
  • White House says advisers would recommend Obama veto bill

Federal Reserve Chair Janet Yellen urged lawmakers to reject proposed legislation to increase congressional oversight of the central bank that she said would harm the economy, a message later reinforced by a White House veto threat.

"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 U.S. House Speaker Paul Ryan and House Democratic leader Nancy Pelosi on Tuesday. The legislation was introduced in July by Michigan Republican Bill Huizenga and is scheduled for a vote this week in the Republican-controlled House.

Yellen’s letter is the latest maneuver in skirmishes between the Fed and Congress, where lawmakers from both sides of the aisle have criticized it in the aftermath of the financial crisis for a lack of accountability and for being under the sway of Wall Street. Republican presidential candidates, courting conservative voters wary of its zero interest rate policies in place for seven years, were sharply critical of the central bank during a debate last week.

The proposal before the House, called the Fed Oversight Reform and Modernization Act, would require the Fed to establish a mathematical formula that would dictate how the Federal Open Market Committee adjusts policy, and would give the Government Accountability Office responsibility for determining whether the adopted rule met the legislation’s criteria.

Difficult Path

It will face a difficult path to ever becoming law. If the House votes on and passes the bill, Republicans in the Senate will still need to attract Democratic votes to overcome procedural hurdles and get the legislation to the White House, where it could be vetoed by President Barack Obama. The White House later said the administration “strongly opposed” the measure and cautioned that Obama’s senior advisers would recommend he veto the bill if it reached his desk.

The bill "would effectively put Congress and the GAO squarely in the role of reviewing short-run monetary policy decisions and in a position to, in real time, influence the monetary policy deliberations leading to those decisions,” Yellen said. She has previously criticized efforts to make policy makers follow a rule along the lines of the Taylor Rule, named after Stanford University economist John Taylor.

The bill would also enable the GAO to review and analyze the Fed’s monetary policy decisions at any time, which Yellen said in the letter would undermine the Fed’s independence and "likely" lead to an increase in inflation fears and market interest rates and diminished status of the dollar in global financial markets.

Furthermore, Yellen is concerned that the bill places restrictions on the Fed’s emergency lending authorities and supervisory responsibilities, she said in the letter.

House Financial Services Committee Chairman Jeb Hensarling defended the proposed legislation in a statement responding to Yellen’s letter.

"Since the financial crisis, the Fed’s historically unconventional monetary policy and vastly expanded powers granted by Dodd-Frank would make the Fed unrecognizable to members of Congress who created it 100 years ago," the Texas Republican wrote, referring to the 2010 Dodd-Frank financial reform act. "While the Fed’s unusual monetary activities and power have increased, there has regrettably been no corresponding increase in its transparency and accountability. The FORM Act will correct that.”

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