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Waters: H.R. 3189 Puts Monetary Policy on 'Auto Pilot'

During floor consideration of H.R. 3189, the so-called FORM Act, Congresswoman Maxine Waters (D-CA), Ranking Member of Financial Services Committee, urged rejection of the bill, which seeks to hamstring the Federal Reserve’s ability respond to variable market conditions, limit its independence, and undercut its efforts to fulfill its dual mandate.

H.R. 3189 also adds an additional layer of bureaucracy to monetary policy making, establishing a Monetary Policy Commission that would review and make recommendations on monetary policy, including the precise operational regime and instruments used in setting such policy. ‎

In a rare move, Federal Reserve Chair Yellen spoke out against the measure in a letter released earlier this week, stating in no uncertain terms that the bill “would severely damage the U.S. economy were it to become law.” Yellen went on to highlight how H.R. 3189 would undermine the Federal Reserve’s ability to continue promoting the recovery by undermining efforts to decrease unemployment and keep prices stable.

The full text of the remarks is below.

“Thank you Mr. Chairman.

I rise today in strong opposition to H.R. 3189, a bill that would undermine the Federal Reserve’s monetary policy independence, politicize its decision making, curtail its ability to respond to a wide range of dynamic economic data, and weaken its ability to effectively carry out its regulatory responsibilities to promote the safety and soundness of our financial system.

Mr. Chairman, H.R. 3189, the “Fed Oversight Reform and Modernization Act” should more appropriately be called the “Eliminate the Federal Reserve’s Ability to Support the American Economy and Promote Full Employment Act”.

While no Federal agency is perfect, and should be reflexively shielded from reform, this bill does not reflect a good faith effort to strengthen the Federal Reserve, or hold it accountable to its mission to keep inflation low and stable and to promote full employment.

Rather, this bill is designed to put monetary policy on auto pilot, under a strict rules based approach, subject to reviews and audits by the GAO. This approach seeks to discourage monetary policy makers from considering the wide range of ever-changing economic data that is relevant to effective decision making, and would discourage the Fed from engaging in the types of bold and forceful actions that have been so critical to our economy’s recovery over the past six years.

As the largest economy in the world that is increasingly interconnected to a vast and complex global economy, the notion that we should be putting blinders on our central bank, strikes me as a recipe for disaster.

In fact, had the Federal Reserve taken the approach called for in the underlying bill, during and in response to the recent financial crisis, economic performance would have been substantially worse.

As Federal Reserve Chair Janet Yellen put it in a letter to Congressional leadership earlier this week “had the FOMC been compelled to operate under a simple policy rule for the past six years, the unemployment experience of that period would have been substantially more painful that it already was, and inflation would have been even further below the FOMC’s 2 percent objective.”

But the straight-jacket approach to monetary policy isn’t the only reason to oppose this bill.

H.R. 3189, includes a host of provisions that represent the latest Republican effort to block financial regulators from fulfilling their responsibility to promote the safety and soundness of our financial system as part of the Dodd-Frank Act.

In particular the bill would impose unworkable cost-benefit analysis requirements that are designed to slow new rulemakings to a screeching halt, and ensure the few that do get issued are tied up in court.

The bill also requires the Federal Reserve to make public and solicit comments on its stress test scenarios, a move that while popular with the biggest banks, would undermine the effectiveness of the tests, turning this valuable regulatory tool for assessing the health of the financial system in to a useless exercise.

Finally, the Rules Committee Print adds to the end of H.R. 3189 the text of H.R. 2912, a bill that would establish a partisan commission with twice as many Republicans as Democrats, to review the Federal Reserve’s conduct of monetary policy and recommend changes to its mandate as well as the specific instruments and operational regime to be used in achieving it.

The fact is the Federal Reserve’s current dual mandate and operational monetary policy independence have served the economy well. Such independence ensures that policy decisions are empirically driven rather than motivated by short-term political pressures, while its clear objectives allow Congress to hold it accountable.

Operating under the current model the Federal Reserve played a major role in ending the panic that gripped the financial sector in 2008, and through its sustained efforts, it has supported the creation of more than 13.3 private sector jobs and cut the unemployment rate in half since the height of the crisis, all while keeping inflation well below target.

Frankly, I think it is a terrible idea to put those who thought shutting down the government was a good idea, and who thought fiscal austerity would grow the economy, in a position to micromanage our monetary policy too.

Finally, I would be remiss if I failed to note that the Congressional Budget Office estimates that this bill will cost $109 million over ten years by forcing the Federal Reserve to jump through new rulemaking and administrative hoops. To pay for this cost, the Rules Committee adopted an amendment that would raid $60 billion from the Federal Reserve’s surplus account, a buffer that inspires confidence in the central bank itself. Ironically, this is the very same fund the Republicans voted to eliminate just two weeks ago.

For all of these reasons, I would urge members to join me in opposing this legislation, that would do enormous damage to our economy and the American people.

I reserve the balance of my time.”


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