House proposes monetary changes for Federal Reserve

In an effort to reform U.S. monetary policy, The House is proposing a bill called the FORM Act, an acronym for the Fed Oversight Reform and Modernization Act of 2015.

Essentially this act would institute four key policy changes to the Federal Reserve. Those changes are:

1.) Require the Federal Reserve to Operate Under a Rules-Based framework.
2.) Restrict the Federal Reserve Emergency Lending Authority.
3.) The ability to audit the Federal Reserve.
4.) Establishment of the Centennial Monetary Commission.

Created in 1913 with the enactment of the Federal Reserve Act, the Federal Reserve was established in response to a series of financial crises from the panic of 1907. Since then, the role and responsibilities of the Federal Reserve System and its structure has expanded, particularly due to the Great Depression in the 1930s.

With the Federal Reserve Act, Congress established three prime purposes for monetary policy – maximum employment, stable prices, and moderate long-term interest rates. The first two objectives are commonly known as the “dual mandate”. The duties of the Fed have expanded over the years to include supervising and regulating banks, maintaining the stability of the financial system and providing financial services to depository institutions, the U.S. government, and foreign official institutions.

As proposed, the FORM Act would require the central bank to tie interest rate policy to a mathematical rule, committing the Fed to moving interest rates up or down depending on economic indicators like the jobless rate and inflation. It would also permit the Fed to choose its own monetary policy rule. This would be a significant change in direction from the past where it operated within a purely discretionary policy framework. The consensus is that in allowing this change it would greatly reduce the uncertainty regarding the Fed’s future policy actions. However, it should be noted that the central bank would be hesitant to support this change because it limits their discretionary authority.

This was clearly evidenced in a recent letter by Federal Reserve Chairwoman Janet Yellen to the House Leadership where she stated “unfortunately the FORM Act attempts to increase transparency and accountability through misguided provisions that would expose the Federal Reserve to short term political pressures. 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.”

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