In a letter sent to the Capitol, Yellen blasted a bill due for a House vote that would overhaul how the Fed does its business.
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The U.S. House is expected to vote on the legislation Wednesday or Thursday forcing significant changes on how the Federal Reserve manages its affairs.
Traders are also hoping to gain more insight on how exactly the Fed will use new policy tools, including their reverse-repo program, to raise rates after officials said in July they would like to provide operational details before taking steps to tighten policy.
In a letter to House Speaker Paul Ryan (R., Wis.) and the chamber’s Democratic leader, Nancy Pelosi (D., Calif.), dated November 16, Ms. Yellen pushed back against the bill, saying its provisions on rules-based policy-making are ” significantly flawed” and would lead to poor economic outcomes.
“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”, she wrote.
A few congressional Republicans have pressed for the Fed to adopt rules and justify to Congress in a policy “audit” any cases where rate decisions deviate from that rule.
Republicans on Financial Services Committee said the bill will allow the Federal Reserve to choose its own strategy and also give it the flexibility to amend its strategy or depart from it if economic conditions warrant.
They argue the bill does not interfere with the Fed’s independence in setting monetary policy.
“The Federal Reserve is an independent entity created to be free from political pressures and its independence is key to its credibility and its ability to act in the long-term interest of the nation’s economic health”, the administration’s Office of Management and Budget said in a statement opposing the bill.
The GOP legislation would also require the Fed to be more transparent about the stress tests it requires the country’s biggest banks to pass each year.
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Economists have debated for years the relative merits of basing interest rate policy on rules vs. discretion- whether central bankers should adhere to a mathematical formula or maintain a few wiggle room based on circumstances and judgment.
