Yellen: GOP Fed bill would ‘severely damage’ economy

Federal Reserve Chairwoman Janet Yellen is telling lawmakers that pending legislation would “severely damage the U.S. economy.”

In a letter sent to the Capitol, Yellen blasted a bill due for a House vote that would overhaul how the Fed operates. Among the changes in the bill, offered by Rep. Bill Huizenga (R-Mich.), is one that would require the Fed to steer monetary policy based on a predetermined set of policy rules. The House is set to consider the legislation this week.

{mosads}“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,” she wrote.

Yellen said the policy rule requirement, which would have the Fed set policy following a formula based on economic data, would upend a “fundamental principle” of central banking and effectively hand the keys for monetary policy to Congress.

Conservatives frustrated with the Fed’s expansive policy since the financial crisis have argued that the Fed should adhere to an explicit policy rule, which they argue would help markets anticipate Fed moves and ensure steadier policy.

But the Fed has fiercely resisted efforts to tie policy down to a specific set of rules, and Yellen’s letter was a relatively rare instance of pushback from a central bank that typically steers clear of telling Congress what to do.

While the bill would allow the Fed the policy rule, it also would require the Fed to explain to Congress its rationale. The Fed would also be subject to outside review anytime it diverted from that policy.

Yellen said the specter of looming audits over policy moves would hinder the bank’s ability to set policy effectively and that the economy would have suffered if the Fed had such restrictions in recent years.

She said that millions more Americans would be unemployed if the Fed had been required to stick to a policy rule following the 2008 financial crash and that only the Fed’s ability to be flexible prevented that outcome.

Yellen also pushed back on a provision that would subject the central bank’s monetary policy decisions to a full audit. While most of the Fed’s operations are subject to outside review, the “Audit the Fed” push in Congress is aimed at obtaining a Government Accountability Office review of internal policy deliberations — the privacy of which the Fed fiercely protects.

Yellen’s letter follows a push by one of Washington’s most prominent conservative groups in support of the bill. Heritage Action, the political arm of the Heritage Foundation, told lawmakers on Tuesday it would be using the vote in its annual member scorecard.