Fed Reform Battle Heats Up in Congress

The Federal Reserve headquarters in Washington, DC (photo credit: Dan Smith, CC BY-SA 2.5)
The Federal Reserve headquarters in Washington, DC (photo credit: Dan Smith, CC BY-SA 2.5)

A new bill seeking to increase oversight on the Federal Reserve and force it to endorse a rule will likely come up in the House this week, kicking the debate over U.S. monetary policy into high gear:

The bill, called the Fed Oversight Reform and Modernization Act — FORM Act for short — deals with a lot of issues relating to the Fed’s management of U.S. monetary policy, but one element of the bill will receive most of the attention and commentary by monetary policy specialists. This is the bill’s requirement that the Fed publish a rule that would, in theory, explain what the Fed would do to achieve the twin goals of low inflation and economic growth. The Fed doesn’t have to follow the rule, but it must explain why it varies from the rule when it is does so.

Unsurprisingly, Federal Reserve Chair Janet Yellen is not happy about the idea.  She wasted no time writing a letter to Speaker Paul Ryan asking him to reject the bill, calling the sections pertaining to monetary policy “particularly troubling”:

“This provision would politicize monetary policy and bring short-term political pressures into the deliberations of the FOMC by putting into place real-time second guessing of policy decisions,” Yellen wrote in the letter. “Such action would undermine the independence of the Federal Reserve and likely lead to an increase in inflation fears and market interest rates, a diminished status of the dollar in global financial markets, and reduced economic and financial stability.”

The FORM Act’s sponsor, Bill Huizenga, disagrees:

“The Fed’s recent high degree of discretion and its lack of transparency in how it conducts monetary policy demonstrate that not only are reforms needed, but more importantly that reforms are necessary.  We need to modernize the Federal Reserve and bring it into the 21st Century.” said Huizenga in a statement.

Nick Arnold is a researcher for the American Principles Project.