The bill, introduced by Bill Huizenga of Michigan and Scott Garrett of New Jersey, members of the House Financial Services Committee, would require the Fed to set out a rule for its decisions regarding interest rates to Congress, and in some cases have that rule scrutinized by the Government Accountability Office.
In limiting the Fed’s discretion, the bill is similar to the "Audit the Fed" bill that passed the House with bipartisan support in 2012 and which would have subjected the Fed’s monetary policy decisions a GAO audit.
Like that bill, the Huizenga-Garrett measure, called the Federal Reserve Accountability and Transparency (FRAT) Act, is unlikely to pass the Senate and become law. But it is a sign of discontent in the lower chamber with the independent central bank's unconventional efforts over the past few years to stimulate the economy, as well as lingering mistrust of the bank following its 2008 bailouts of the banking system.
The bill is also a mark of the prestige that former George W. Bush Treasury official and Stanford professor John Taylor enjoys among Republicans. The legislation would require the Fed to explain why its preferred rule for monetary policy deviated from what is known as the "Taylor Rule," an equation for determining interest rates based on unemployment and inflation that Taylor devised and that is now a standard topic in economics textbooks. In other words, it would set the Taylor Rule as the baseline policy for the Fed.
Speaking at a House Financial Services hearing on the bill Thursday, Taylor praised the Huizenga-Garrett bill, arguing that it would not be an intrusion on the independence of the central bank. “The idea of this legislation is when the Fed deviated from its own rule, it would be required to say why,” he said.
Taylor has been a consistent critic of the Fed in recent years, and over the course of the recovery has called for more explicit monetary policy rules and higher interest rates. In his 2009 book Getting Off Track, Taylor blamed the Fed for the financial crisis, arguing that the central bank kept interest rates too low throughout the early 2000s, stoking the increase in housing prices. If the Fed had followed the Taylor Rule, according to Taylor, it would have raised rates earlier in the decade, rather than keeping the short-term rate at 3 percent through 2003. By tightening monetary policy earlier, Taylor claimed, the Fed could have prevented the housing bubble and subsequent collapse.
In a post on his personal blog, Taylor also justified the Huizenga-Garrett bill on the basis that Congress has required similar explanations from the Fed in the past. The 1978 Humphrey-Hawkins Full Employment Act required that the Fed state its plans for the growth of the money supply and credit. The law said that the Fed would be free to depart from its plans if necessary -- but only if it later explained to Congress why it did so. That provision was removed in 2000.
Nevertheless, U.S. central bankers and academics are increasingly critical of efforts by the legislature to oversee short-term deliberations about interest rates, on the grounds that such actions subject monetary policy to politics.
Testifying at the House hearing Thursday, Massachusetts Institute of Technology economist Simon Johnson warned that the bill “is worse than monetary policy by Congress. This is monetary policy by some kind of Spanish Inquisition.”
Janet Yellen, discussing the Fed audit bill at her confirmation hearing in November, explained that she too is skeptical of congressional efforts to oversee the Fed's monetary meetings. “I believe it's critically important to the economic performance of this country, and we've seen this around the world, that allowing the central bank to be independent in formulating monetary policy is critical to assuring markets and the public that we will achieve price stability,” she said then, adding that she “would be very concerned about legislation that would subject the Federal Reserve to short-term political pressures that could interfere with that independence.”
House Financial Services Committee Chairman Jeb Hensarling downplayed the effect that the bill would have on the central bank's independence at the hearing, saying that “we do not suggest for a moment that Congress, much less the White House or Treasury, should conduct monetary policy operations.” Instead, he said, the bill would simply request that the Fed issue a “clear map” for its plans for interest rates.