New bill requires the Federal Reserve to adopt policy strategy

House Republicans have introduced a bill requiring the Federal Reserve to clarify its strategy for monetary policy.

The Federal Open Market Committee would have to “describe the strategy or rule,” according to the legislation, for “systematic quantitative adjustment” of a policy instrument.

While the legislation has little chance of passing in a Senate controlled by Democrats, it signals Republican interest in a more constrained and transparent Fed as it closes one of the most expansive periods in its 100-year history. U.S. central bankers have kept the benchmark policy rate at zero for more than five years and used bond purchases to hold down long-term interest rates, expanding their balance sheet to $4.38 trillion in the process.

Fed Chair Janet Yellen is likely to appear before House and Senate committees this month to deliver her semi-annual monetary policy testimony.

The legislation defines the Fed’s policy instruments as the federal funds rate, interest on excess reserves, and the rate banks pay to borrow directly from the Fed. It omits reverse repurchase agreement rates, a tool the Fed is planning to help it raise other market rates as it tightens monetary policy.

Stanford University economist John Taylor, who published a 2011 essay in the Cato Journal titled “Legislating a Rule for Monetary Policy,” will testify before the House Committee on Financial Services this week. Taylor is the author of a monetary policy rule that bears his name. Taylor argued that the economy fares better when policy makers pursue a systematic approach that reduces the chances of error. His rule, developed in 1993, sets the main interest rate based on the rate of inflation and the gap between the economy’s potential and actual level of output.

Under the bill, the FOMC would also be required to submit its rule to Congress. The legislation leaves the strategy up to the Fed, although any changes in the rule would trigger an audit.

The bill is sponsored by Republicans Bill Huizenga of Michigan, a vice chairman of the House Financial Services subcommittee on monetary policy, and Scott Garrett of New Jersey, who filed Fed reform legislation earlier this year.

The bill would also require more transparency on the Fed’s bank oversight and quarterly testimony by the Fed chair.

Copyright 2014 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

Comments
comments powered by Disqus