House passes bill calling for rule-based monetary policy

A Federal Reserve police officer keeps watch while posted outside the Federal Reserve headquarters in Washington, September 16, 2015. REUTERS/Kevin Lamarque

WASHINGTON (Reuters) - The U.S. House of Representatives on Thursday approved a bill that would make the Federal Reserve set interest rate policy using a mathematical rule, a proposal that has little chance of becoming law given a White House veto threat.

The House approved the Fed Oversight Reform and Modernization Act in a 241 to 185 vote thanks to overwhelming Republican support.

The bill is a sign of the deep suspicion many Republican lawmakers hold against the U.S. central bank, which played a major role in America’s policy response to fight the 2007-09 recession.

Conservative lawmakers worry the Fed’s policies, which included pumping trillions of dollars into the banking system and slashing its benchmark interest rate to near zero, could inflate bubbles in the economy and lead to high inflation.

The proposal now passes to the Senate where Obama’s Democrats have the ability to stop most legislation despite being in the minority. It has nonetheless prompted a host of Fed policymakers to air their concerns.

Fed Chair Janet Yellen said this week the bill would severely damage the U.S. economy and curtail Fed independence. The Obama administration opposes the proposal because it believes it would hinder the Fed’s ability to fight recessions.

Under the type of policy rule envisioned by lawmakers, the Fed would commit to moving interest rates up or down depending on the readings of economic indicators like the jobless rate and inflation. The rule adopted would be made public and any deviation from it would lead to a congressional audit.

“If the Federal Reserve explained to the public how it made its decisions ... families could better plan for the future,” Speaker of the House Paul Ryan, a Republican, said.

In a letter Ryan on Tuesday, Yellen argued that policymakers do not understand the economy well enough to come up with a rule that would reliably guide the economy through its ups and downs.

Reporting by Jason Lange and David Lawder; Editing by Chizu Nomiyama