July 30, 2014 / 2:00 PM / 3 years ago

House panel approves bill to force Fed to follow rule

The sun rises to the east of the U.S. Federal Reserve building in Washington, July 31, 2013.Jonathan Ernst

WASHINGTON (Reuters) - The 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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