Yellen opposes GOP proposal to boost Fed oversight

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 US economy.

“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”.

“If the president were presented with (the legislation), his senior advisors would recommend that he veto the bill”, the statement said.

It foresees requiring the Fed to establish a mathematical formula for setting interest rates that would be based on readings of economic indicators, such as the jobless rate and inflation.

Recently, Yellen said that an interest rate increase at the Fed’s next meeting in December was a “live possibility”. Even if the bill passes the House, Senate Republicans will need to court Democratic votes in order for it to succeed there.

The “Fed Oversight Reform and Modernization Act” would tie the hands of Fed policy-makers to a formulaic rule that, if in place during the last six years, would have greatly worsened the impact of the economic crisis, Yellen said in a letter to House Speaker Paul Ryan and House Democratic leader Nancy Pelosi. Yellen’s comments opposing the proposal came in a letter sent to congressional leaders.

The House bill, sponsored by Rep. Bill Huizenga (R., Mich.), would raise the threshold under which the central bank could invoke its “lender of last resort” powers.

It require the Fed to provide more information about the central bank’s bank stress tests and about global financial regulatory negotiations conducted by the Federal Reserve, Treasury Department, Office of the Comptroller of the Currency, Securities and Exchange Commission, and Federal Deposit Insurance Corporation.

She said that millions more Americans would be unemployed if the Fed had had to stick to a policy rule following the financial crash, and only the Fed’s ability to be flexible prevented that. Mr. Taylor and a few Fed officials are in the first camp, saying rules-based policy-making creates more predictability and openness, leading to better economic outcomes.

“Policymakers have to carefully weigh the advantages and disadvantages of alternative monetary implementation frameworks in the presence of new policy tools”, Yellen said in remarks at a two-day research conference sponsored by the Fed.