House approves GOP legislation to increase Fed oversight; Yellen warns bill could harm economy

WASHINGTON – The Republican-controlled House approved a bill Thursday that supporters said would make the Federal Reserve more transparent and accountable, defying a veto threat.

The bill would direct the Fed to be more open in communicating monetary policy decisions and require the central bank to use a mathematical rule in deciding on interest rates. The House approved the measure on a 241-185 vote.

Federal Reserve Chair Janet Yellen called the bill’s approach unworkable and said it would lead to “poor economic outcomes.” The White House said in its veto threat statement that the bill could compromise the Fed’s independence and undercut its credibility as it acts in the nation’s long-term economic interests.

House Speaker Paul Ryan, R-Wis., praised the bill, saying that forcing the Fed to explain to the public how it makes decisions would give Americans greater confidence in those decisions.

If the bill is enacted, “families could better plan for the future, invest their money wisely and create opportunity for all of us,” Ryan said.

The bill’s sponsor, Rep. Bill Huizenga, R-Mich., said the measure provides the Fed with the flexibility necessary to conduct monetary policy “but holds the Fed accountable by requiring it to communicate its policy to Congress and the American people.”

In a letter to Ryan and House Minority Leader Nancy Pelosi this week, Yellen said passage of the bill would be a “grave mistake” that could harm the U.S. economy.

But House Financial Services Committee Chairman Jeb Hensarling, R-Texas, said the bill, known as the Fed Oversight Reform and Modernization 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.

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 that if the Fed had 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 further from the Fed’s 2 per cent goal.

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.

The bill now heads to the Senate.