UPDATE 1-U.S. House panel approves bill to force Fed to follow rule

Wed Jul 30, 2014 10:31am EDT

(Adds vote count, background)

By Michael Flaherty

WASHINGTON, July 30 (Reuters) - The U.S. House of Representatives Financial Services Committee narrowly approved a bill on Wednesday that would require the Federal Reserve to set a specific rule to follow when implementing monetary policy.

The bill, which is opposed by the U.S. central bank, passed the panel on a 32-26 vote, clearing it for possible consideration by the full House.

The prospects it will become law this year are slim. Even if it were approved by the Republican-led House, there is no sign the Democrat-controlled Senate would take it up.

Nevertheless, it serves as a marker in an ongoing political debate over the Fed's role. Some lawmakers are uncomfortable with the extraordinary steps the central bank took to battle the 2007-2009 financial crisis and recession.

While Democrats argued the bill was an assault on the Fed's political independence, a group of Republican lawmakers in the House are intent on placing more scrutiny on the central bank.

In addition to requiring the Fed to follow a rule in making its interest rate decision, the bill would force it to disclose the salaries of its highest-paid staff and conduct cost-based analyses before enacting any regulation.

It would also require quarterly testimony from the central bank's chair, who currently presents a monetary policy report to Congress just twice a year.

The most controversial part of the legislation, however, is the requirement for the Fed to generate a monetary policy rule. It would be required to justify the rule if it deviated from the so-called "Taylor Rule" that produces an interest rate recommendation based on changes in inflation and GDP growth.

Whenever the Fed amended its rule, its decision would be subject to a congressional audit.

Fed Chair Janet Yellen has said the adoption of any firm, monetary policy rule would be a "grave mistake," citing the need for discretion and flexibility. A poll of academic economists by the University of Chicago found a strong majority opposed to the legislation, with many respondents arguing the bill threatened to erode the Fed's independence. (Reporting by Michael Flaherty; Editing by James Dalgleish and Andrea Ricci)

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