US Federal Reserve Chair Janet Yellen on Tuesday said that a proposed law to more closely oversee the US Federal Reserve would politicize monetary policy and do deep harm to the US economy.
The Fed Oversight Reform and Modernization Act (FORM Act) would tie the hands of Fed policymakers 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 US House of Representatives Speaker Paul Ryan and House Democratic leader Nancy Pelosi.
“This legislation would severely damage the US economy were it to become law,” she wrote.
It would also “likely lead to... a diminished status of the [US] dollar in global financial markets, and reduced economic and financial stability.”
Setting up an economic rule to guide US Fed monetary policy, as the FORM Act proposes, “would essentially repeal the Federal Reserve’s remaining ability to act in a crisis.”
The act was to come up for a formal vote in the full US House of Representatives this week and the White House said on Tuesday that US President Barack Obama could veto it if it passes the entire Congress.
THREAT
The White House said the measure “threatens one of the central pillars of the nation’s financial system and economy.”
The FORM Act, which passed the US House Financial Services Committee in July, aims to make US Fed policymaking “more predictable” and “more transparent,” the panel said.
Committee leaders say the US Fed is too opaque and needs to regularly demonstrate “how its policy choices compare to a benchmark rule.”
“The Fed favors a more unpredictable ‘forward guidance’ approach to monetary policy, which we’ve seen lacks clarity and creates economic uncertainty,” US Services Committee Chairman Jeb Hensarling said last week.
“The FORM Act corrects these problems through increased transparency and accountability instead of policy mandates, which would subject the Fed to further political pressures,” Hensarling said.
However, Yellen said that the US Fed was transparent and that the bill “would politicize monetary policy” and “bring short-term political pressures” into monetary policy decisionmaking.
The act would effectively put Congress “squarely in the role of reviewing short-run monetary policy decisions” by constantly assessing policy outcomes against the fixed rule.
If the US Fed had been forced to abide by the proposed mathematical rule during the crisis years, she said, “the unemployment experience of that period would have been substantially more painful than it already was.”
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