Federal Reserve Chairman Janet Yellen on Tuesday wrote a letter to newly-appointed Speaker of the House Paul Ryan and House Democratic leader Nancy Pelosi urging Congress to reject a proposed bill that would increase transparency from the Fed.
H.R. 3189, known as the Fed Oversight Reform and Modernization (FORM) Act, is scheduled for a full House vote this week after passing in the House Financial Services Committee by a 33-25 vote on July 29. The bill is sponsored by Rep. Bill Huizenga (R-Michigan), who is the House Monetary Policy and Trade Subcommittee Chairman.
Yellen made it clear in the letter that she was vehemently opposed to the FORM Act, saying that “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.”
The FORM Act requires the Fed to transparently communicate its monetary policy decisions to the American people by requiring the Fed to generate a monetary policy strategy of its own choosing, in order to provide the American people with more transparency about the factors that lead to the Fed’s monetary decisions. The Act would also eliminate the restrictions on the Government Accountability Office’s ability to audit the Fed, allowing the GAO to conduct an audit of the Fed anytime there is a policy change.
“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.”
Among other provisions, the FORM Act requires more transparency from the Fed’s stress test of the biggest financial institutions and would limit the Fed’s ability to make emergency loans to those institutions during economic downturns.
“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.”
While Yellen claimed in the letter that the FORM Act would make it more difficult for the Fed to do its job and would be detrimental to the economy, House Financial Services Committee Chairman Jeb Hensarling (R-Texas) responded to the letter in defense of the FORM Act.
"While the Fed’s unusual monetary activities and power have increased, there has regrettably been no corresponding increase in its transparency and accountability,” Hensarling said Tuesday in response to Yellen’s letter. “The FORM Act will correct that.”
At Yellen’s Congressional testimony earlier this month, Hensarling said, “Simply put, the Fed must not be allowed to shield its vast regulatory activities from the American people and congressional oversight by improperly cloaking them behind its traditional monetary policy independence.”
The FORM Act’s sponsor, Bill Huizenga, stated, “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.”
Sen. Rand Paul (R-Kentucky) re-introduced similar legislation in the Senate last week, S. 2232, known as the “Audit the Fed” bill, to which Yellen is also vehemently opposed.