Fed chief: GOP plan would be ‘grave mistake’

Federal Reserve Chairwoman Janet Yellen on Wednesday rejected House Republican legislation that would give the central bank a set formula for changing interest rates.

"It would be a grave mistake," Yellen told the House Financial Services Committee during her second day of testimony on her semi-annual report to Congress.

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Yellen argued that if the central bank had been confined to a set formula during the recent economic crisis, the results would've been "dreadful."

As part of a top-to-bottom review of the Fed, Republicans on the House Financial Services Committee are proposing a series of policy changes for the central bank. One bill introduced by Reps. Bill Huizenga (R-Mich.) and Scott Garrett (R-N.J.) earlier this month would stipulate that the Fed either follow a set standard for monetary policy or face a complete audit of its books by Congress.

The chairman of the panel, Rep. Jeb Hensarling (R-Texas), fought back against Yellen’s characterization of the bill and said Republicans are not trying to mandate the Fed’s policy choices. He said the bill would allow the Fed to change its formula at its discretion, requiring the central bank to explain such changes.

"The [bill] in no way, shape or form dictates monetary policy," Hensarling said at the hearing. "If the Fed wants to conduct monetary policy based upon viewer text messages from the 'America Idol' television show, it will retain the unfettered discretion to do so."

He continued: "If the Fed wants to conduct monetary policy based upon a rousing game of 'rock, paper, scissors' on odd Tuesdays at the [Federal Open Market Committee], it will retain the unfettered discretion to do so. The Fed can set any rule it wishes. It can change the rule anytime it wishes. It can deviate from the rule any time it wishes ... it simply has to report and explain this to the rest of us. That’s what transparency and accountability are all about."

Ranking Democrat Rep. Maxine Waters (D-Calif.) blasted the proposal, dubbing it a "straightjacket approach" that would "undercut" and "paralyze" the central bank.

Waters referenced Yellen’s warning, delivered Tuesday in Senate testimony, that stock in social media and biotechnology companies appear out of line with typical valuations.

"Whether emerging threats to financial stability come from social media or elsewhere, this shortsighted legislation would be a recipe for disaster,” Waters said.

The GOP proposal for a strict monetary standard has been dubbed The Taylor Rule, named after John Taylor, a Stanford University economist and former economic adviser to Mitt Romney.

Taylor was considered to be a contender to lead the central bank among Fed-watchers had Romney won the 2012 presidential election.