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Fed chair denounces proposed law as 'grave mistake'

Federal Reserve chief Janet Yellen has warned Congress against passing a law that would require interest rates to be set based on a mathematical rule. Legislators just don't know enough about the economy, she said.

After American legislators from both parties called for the Fed to be subject to tighter controls, Yellen on Tuesday wrote a letter to Republican and Democratic leaders imploring them to not interfere with her mandate of deciding the nation's monetary policy.

The proposed law in question is called the FORM Act, an acronym for Fed Oversight Reform and Modernization. It foresees requiring the Fed to establish a mathematical formula for setting interest rates that would be based on readings of economic indicators, such as the jobless rate and inflation.

It would also grant broader authority to the Government Accountability Office to check if the Fed was adhering to the law.

A strongly worded letter

In her letter to House speaker Paul Ryan and minority leader Nancy Pelosi, Yellen argued that lawmakers didn't know enough about the economy to come up with a reliable formula. She said the proposed measures would endanger the US economy by limiting her ability to prescribe quick fixes to problems.

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The base rate explained

"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.

Yellen also warned that the bill would "politicize monetary policy and bring short-term political pressures into the deliberations" to raise or lower interest rates, because any decisions would be subject to close inspection in real-time.

The FORM Act could be voted upon in the House of Representatives later this week.

Lawmakers that have called for stricter constraints on the Fed include Republican presidential candidates Rand Paul and Ted Cruz, as well as Democratic Senator Elizabeth Warren.

cjc/hg (Reuters, AFP)

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