WASHINGTON (Reuters) - Sensing an election-year issue, Democrats in the House of Representatives who are opposed to a Republican bill that would eliminate the Federal Reserve's mandate on full employment on Wednesday called for a hearing.
The bill by Representative Kevin Brady would require the Fed to focus solely on price stability, as is the practice for most major central banks around the world. The Fed's current mandate calls on the U.S. central bank to ensure full employment along with low and stable inflation.
House Democrats questioned in a letter released on Wednesday why Congress should curtail the Fed's efforts to boost employment when the jobless rate is at a lofty 8.3 percent.
"Despite the fact that the U.S. is still recovering from the worst economic crisis since the Great Depression, some Republicans argue that the Federal Reserve should narrowly focus its efforts on keeping inflation low instead of balancing that goal with efforts to create jobs," the 27 Democratic members of the Financial Services Committee said in a letter to the panel's Republican chairman, Spencer Bachus.
Brady, along with other Republicans, is unhappy that the Fed has used its full employment mandate to justify ultra-accommodative monetary policies, particularly the $2.3 trillion in bonds it has bought as a means to drive down long-term interest rates.
Critics say the Fed is sowing the seeds of future inflation and is straying onto congressional fiscal turf with aggressive efforts to stimulate growth.
Democrats objected to a bill provision to limit the Fed's ability to buy mortgage-related debt, saying the central bank's bond-buying initiatives were effective in preventing a deeper recession.
The bill would restrict the Fed from buying anything other than Treasury securities except in an emergency. The Fed has bought debt issued by mortgage finance companies Fannie Mae and Freddie Mac and mortgage-backed securities as part of its efforts to boost growth during and after the 2007-2009 recession.
"The Brady legislation would largely eliminate the ability of the Federal Reserve to pursue what ... economists identify as the most important factor supporting the economic recovery," the lawmakers wrote.
The Democratic lawmakers also took issue with the Brady bill's provision to give permanent votes on the Fed's policy-setting Federal Open Market Committee to all 12 regional Fed bank presidents. Currently, the regional Fed presidents rotate through four voting slots, with only the New York Fed bank president always a voter.
The regional presidents are appointed by their boards and, unlike the seven members of the Fed's Board of Governors, are not confirmed by the Senate. As a result, the Democratic lawmakers said, they lack public accountability.
With a divided Congress, Brady's measure is unlikely to become law, but it sets a marker for efforts to clip the Fed's wings should Republican power increase in November elections.
At a discussion of his bill earlier this week, Brady acknowledged passage of the measure is unlikely this year, but said he hoped it would be the foundation for a longer-term discussion about the Fed's role and mandate.
Reporting by Mark Felsenthal; Editing by Leslie Adler