Today the Chairman of Senate Banking Committee, Richard Shelby, released a draft bill entitled “The Financial Regulatory Improvement Act of 2015” covering a wide range of reforms. Like the widely-discussed House policy rules bill (Section 2 of HR 5018 of last year), this Senate bill (in the first section of Title V) would require that the Fed report on monetary policy rules. In fact, the Senate bill contains important principles regarding policy rules that are in the House Bill and should be ripe for compromise in conference.
Recall that the House bill, as I described in testimony before the Senate Banking Committee in March, “would require that the Fed ‘describe the strategy or rule of the Federal Open Market Committee for the systematic quantitative adjustment’ of its policy instruments. It would be the Fed’s job to choose the strategy and how to describe it. The Fed could change its strategy or deviate from it if circumstances called for a change, but the Fed would have to explain why.”
The Senate bill is quite similar in these essentials.
First, it would require that the Fed report each quarter to Congress “a description of any monetary policy rule or rules used or considered by the Committee that provides or provide the basis for monetary policy decisions, including short-term interest rate targets set by the Committee…” with the stipulation that “such description shall include, at a minimum, for each rule, a mathematical formula that models how monetary policy instruments will be adjusted based on changes in quantitative inputs…”
Second, it would require in each quarterly report “a detailed explanation of any deviation in the rule or rules…from any rule or rules…in the most recent quarterly report.” And to emphasize that rules and strategies have similar meanings, the bill includes a corresponding requirement to report on any monetary policy strategy or strategies. In other words, as in the House bill, the Fed could change strategies or rules, but it would have to explain why.
Neither the House bill nor the Senate bill would require the Fed to follow any particular rule—mechanical or otherwise. There is precedent for both the Senate bill and the House bill in previous legal requirements for the Fed to report on the monetary aggregates. Neither bill would reduce the Fed’s independence; based on my experience in government, they would bolster the Fed’s independence.
There are, of course, some differences between the bills. For example, the Senate bill only requires the Fed to report a rule if such rule provides the basis for policy decisions. However, as is well known from Fed transcripts, the Fed regularly uses policy rules and discusses deviations from such rules, so the bill would require the Fed to report them. It is mainly a matter of transparency and thus hard to object to.
The House bill, but not the Senate bill, would also require that the Fed compare its reported rule with a so called reference rule, which turns out to be the Taylor rule in the House bill. However, since the House bill does not require the Fed to follow any rule, including the Taylor rule, this is a small difference in practice. Moreover, since it is common to compare rules or strategies with that rule, others will likely do that comparison anyway.
Another difference is that the Senate Bill does not have a role for the GAO in determining whether the Fed is complying with the law. This would be the job of the members of Congress and their staffs based on the quarterly reports submitted by the Fed. This change makes the legislation closer to what I originally proposed, and taking the GAO out of the bill will likely remove some objections.
In sum, the Senate policy rules bill endeavors to install transparency and “responsible oversight,” as Senator Shelby puts it, without trying to micromanage the Fed. It maintains the same key reporting principles that are in the House bill in a way that should encourage bipartisan discussion and constructive input from the Fed. It has made the most of an opportunity presented by extensive legislative work and commentary during the past year and moves ahead on needed reform legislation.