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Yellen says forcing Fed to follow formula in setting interest rates would be grave mistake

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WASHINGTON - Federal Reserve Chair Janet Yellen said Wednesday it would be a serious mistake for Congress to require the nation's central bank to adopt a formal policy rule to guide its decisions on setting interest rates.

Yellen faced a barrage of questions from Republican lawmakers about legislation that they are supporting to make the Fed more accountable and make its policy decisions more transparent. One of the requirements would have the Fed adopt a policy rule that would govern future decisions and would have the Government Accountability Office audit the rule.

Yellen rejected that approach and said the Fed needed the flexibility it now has to make policy decisions.

"It would be a grave mistake for the Fed to commit to conduct monetary policy according to a mathematical rule. No central bank does that," Yellen told lawmakers.

She said that while the House legislation which was introduced last week would allow the Fed to deviate from any rule that it set up, any such change would trigger an audit by the GAO, the auditing arm of Congress. She said this procedure would "essentially undermine central bank independence in the conduct of monetary policy."

Yellen's comments came during an appearance before the House Financial Services Committee to present the Fed's semi-annual economic report to Congress.

Yellen repeated the testimony she had given on Tuesday before the Senate Banking Committee in which she said that while the economy is improving, it stills needs support from the Fed in the form of exceptionally low interest rates.

Yellen's discussion with GOP members of the committee over the proposed Federal Reserve Accountability and Transparency Act represented the sharpest questioning she has received from Congress since taking over in February as the Fed leader.

House Financial Services Chair Jeb Hensarling of Texas told Yellen that the Fed had dramatically increased its power in responding to the 2008 financial crisis and deep recession that followed and many lawmakers felt that power needed to be checked.

"The status quo is unacceptable," he said. "A dramatic increase in power calls for a corresponding increase in accountability and transparency."

Yellen maintained that the legislation as written would make it harder for the central bank to carry out the missions given to it by Congress to keep inflation under control and achieve maximum employment.

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