Yellen Warns Against Fed Reforms

Federal Reserve Chair Janet Yellen on Tuesday warned against proposed reforms that would give Congress more oversight of the central bank, saying the changes would politicize U.S. monetary policy.

The FORM Act, backed by a group of Republican members of Congress, “attempts to increase transparency and accountability through misguided provisions that would expose the Federal Reserve to short-term political pressures,” Yellen wrote in a letter to House Speaker Paul Ryan (R-Wis.) and Democratic leader Nancy Pelosi (D-Calif.).

“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 added.

The Fed Oversight Reform and Modernization Act (FORM) is scheduled for a vote in the House of Representatives this week.

In recent testimony before Congress, Yellen defended the Fed’s independence, saying it would be dangerous to allow monetary policy to be initiated and set according to whichever way the political winds were blowing at the time.

Allowing Congress more oversight of the Fed would do just that, she has suggested.

The central bank has come under fire from mostly Republican lawmakers (but also from Democrats) for having perhaps too much power over the U.S. economy given its unilateral ability to raise or lower interest rates without having to answer to any higher authority.

Yellen has argued that that’s the whole point – an independent Fed can set monetary policy without undue political influence from whichever party happens to be in the majority.

The FORM bill would create a mathematical formula for setting interest rates and give the Government Accountability Office power to determine whether the Fed was following criteria established under the law.

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 wrote in her letter.

In any case, the bill’s success is far from guaranteed. It could pass the Republican-controlled House of Representatives but then face difficulty getting through the Democratic-led Senate. And President Obama could veto it if it ever makes it that far.