Republicans on the House Financial Services Committee on Wednesday ratcheted up the pressure on Federal Reserve Chair Janet Yellen about transparency in monetary policy.
The committee, under Chairman Jeb Hensarling (R-Texas), passed legislation known as the FORM Act that would force the Fed to publicly justify its monetary policy decisions.
The legislation, which passed the House in November largely along party lines, would require the Federal Open Market Committee, which sets interest rates, to justify its strategy to the Government Accountability Office within 48 hours of its monthly meetings. Additionally, it would require that the FOMC tell the GAO who supported and opposed the monetary action. The Senate has yet to take up the legislation, where it would likely be unable to bypass Democratic opposition.
Yellen strongly opposes the legislation, as do Democrats who believe it will politicize the FOMC’s decisions.
“I know you’re not a fan of the FORM Act,” Hensarling told Yellen during his opening statement. “I do feel compelled to demand that the Fed adopt a monetary policy course that is predictable, transparent, and sustainable and, barring terribly exigent circumstances, to stick with it.”
Before the hearing, the committee’s Republican majority sent out a letter signed by three Nobel Prize laureates in economics, several former Fed officials, and other prominent economists in support of the FORM Act.
“The legislation enables the Congress to exercise better oversight over monetary policy. It would prevent the Congress from micromanaging the Fed or subjecting it to capricious short-run changes in political views or desires,” the letter read. “If the Fed says that it plans to follow a strategy and it does not, then an answer is required.”
Hensarling read excerpts of the letter at the hearing and then scolded Yellen for her vocal opposition to the legislation, especially given the support from the Nobel laureates. “When you use such apocalyptic and hyperbolic language, you might consider whether or not this undercuts your credibility as Fed chair,” Hensarling said.
Yellen did not back down from her position. In response to questioning from Rep. Mick Mulvaney (R-S.C.) about a “rules-based approach” to monetary policy, Yellen said such policy can’t follow a predetermined strategy and suggested that imposing such a rule would hamstring the Fed’s ability to respond to changing economic conditions.
“We shouldn’t mechanically follow that rule or any other rule. But we need to take into account a large set of indicators of how the economy is performing,” Yellen said. “Monetary policy is not on a pre-set course.”
Yellen will likely face further questions on Fed monetary policy transparency when she returns to Capitol Hill on Thursday to testify before the Senate Banking Committee.