Should the Federal Reserve follow rules or use its own discretion? For Republican lawmakers intent on hemming in the central bank’s powers, the answer is clear: Fed policymaking should be rules-based. For Janet Yellen, who started her tenure as Fed chair just a few weeks ago, there’s a pressing need for creative responses. She favors rules, too, but wants latitude now to stretch the boundaries of central banking.
Led by House Financial Services Committee Chairman Jeb Hensarling of Texas, Republicans have accused the Fed of following a haphazard, discretionary policy that investors have found hard to fathom and that has done little to help the economy, as it recovers slowly from the worst crisis since the 1930s. As an alternative, they want Yellen and her colleagues to adopt guidelines that they say would be more understandable and reliable. “We are into an improvisation phase where an incredible amount of discretionary power has been imparted upon the unelected and relatively unaccountable,” Hensarling says. “I don’t think that is good for promoting long-term economic growth.”