The Fed Oversight Reform and Modernization Act, spearheaded by Michigan Republican Rep. Bill Huizenga, would lift restrictions placed on the Government Accountability Office, enabling the agency to audit the central bank and narrowing its ability to provide emergency bailouts.
The legislation would also require the Fed to use a formula like the Taylor Rule, a tool used to calculate whether nominal interest rates should be changed, when making rate decisions.
“If the Federal Reserve explained to the public how it made its decisions, the American people would have greater confidence in them,” House Speaker Paul Ryan said in a statement after the vote. “Families could better plan for the future, invest their money wisely, and create opportunity for all of us.”
Critics of the bill claim giving the GAO more access would subject the Fed to more public scrutiny, potentially leading to damaging effects on its ability to avert financial crises.
In a letter written to House leaders Tuesday, Fed Chair Janet Yellen said the legislation would subject the central bank to harmful political influence and argued the annual audits conducted by an independent accounting firm under the Inspector General is already an adequate form of oversight.
“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,” she wrote. “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.”
House Financial Services Committee Chairman Jeb Hensarling said the bill is necessary to rein in the central bank’s power and provide the necessary oversight and transparency to restore its accountability.
“The Fed is even authorized to – on a vague finding – break up a financial institution they deem poses a threat to financial stability,” the Texas Republican said in a statement ahead of the vote. “In other words, the Fed can now literally occupy the board rooms of the largest financial institutions in America and influence how they deploy capital.”
The White House said it will veto the measure if it reaches the president’s desk.
For the bill to become law, Senate Republicans would have to attract Democratic supporters to override the president’s threat.