[House Report 115-652]
[From the U.S. Government Publishing Office]
115th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 115-652
======================================================================
MONETARY POLICY TRANSPARENCY AND ACCOUNTABILITY ACT OF 2017
_______
April 25, 2018.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services, submitted the
following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 4270]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 4270) to amend the Federal Reserve Act to ensure
transparency in the conduct of monetary policy, and for other
purposes, having considered the same, report favorably thereon
without amendment and recommend that the bill do pass.
PURPOSE AND SUMMARY
On November 7, 2017, Representative Barr introduced H.R.
4270, the ``Monetary Policy Transparency and Accountability Act
of 2017'', which requires the Federal Open Market Committee's
(FOMC's) annual adoption of a monetary policy strategy and
reference policy rules of its own choosing to facilitate a more
accessible communication of how incoming data and economic
forecasts inform the conduct of monetary policy.
BACKGROUND AND NEED FOR LEGISLATION
The goal of H.R. 4270 is to increase monetary policy
transparency and accountability. According to the Board of
Governors of the Federal Reserve, the FOMC consists of twelve
members--the seven members of the Board of Governors of the
Federal Reserve System; the president of the Federal Reserve
Bank of New York; and four of the remaining eleven Reserve Bank
presidents, who serve one-year terms on a rotating basis. The
rotating seats are filled from the following four groups of
Banks, one Bank president from each group: Boston,
Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St.
Louis, and Dallas; and Minneapolis, Kansas City, and San
Francisco. Nonvoting Reserve Bank presidents attend the
meetings of the Committee, participate in the discussions, and
contribute to the Committee's assessment of the economy and
policy options.
The FOMC holds eight regularly scheduled meetings per year.
At these meetings, the Committee reviews economic and financial
conditions, determines the appropriate stance of monetary
policy, and assesses the risks to its long-run goals of price
stability and sustainable economic growth. FOMC decisions about
the direction and pace of monetary policy depend on ever
changing data and forecasts. By providing for the regular
communication of what data FOMC members expect to consider, and
how those data tend to translate into monetary policy, a non-
binding and plain English publication of a policy strategy and
a non-technical discussion of how actual policy decisions
compare to well-known benchmarks can provide households and
businesses the information they need to make more productive
economic decisions.
The FOMC regularly characterizes its conduct of monetary
policy as ``data dependent.'' In doing so, however, it can
leave households and businesses uncertain about what data
matter and how they matter.
The annual adoption of a monetary policy strategy of its
own choosing, as well as a small set of reference policy
models, reduces policy uncertainty and provides stronger
support for growing economic opportunities.
During the Committee's July 2017 hearing about Monetary
Policy and the State of the Economy, also known as the
``Humphrey-Hawkins hearing'',\1\ Federal Reserve Board Chair
Janet Yellen expressed interest to work with the Committee on
Financial Services to codify a simple and effective framework
for a more transparent and accountable monetary policy. By
synthesizing thoughtful proposals from both sides of the aisle,
this framework can considerably strengthen America's economic
foundation. For example, Democrat witness Dr. Joseph E. Gagnon
shared the following testimony before the Monetary Policy and
Trade Subcommittee:\2\
\1\Full-Committee hearing entitled ``Monetary Policy and the State
of the Economy,'' July 12, 2017. Archived webcast available at https://
financialservices.house.gov/calendar/eventsingle.aspx?EventID=402098.
\2\Monetary Policy and Trade Subcommittee hearing entitled ``The
Fed Turns 100: Lessons Learned Over a Century of Central Banking,''
September 11, 2013. Quoted from page 11 of the printed hearing,
available at https://financialservices.house.gov/calendar/
eventsingle.aspx?EventID=347585.
The best strategy is for the Fed to use various rules
in assessing the stance of policy. Whenever it deviates
noticeably from popular rules, the Fed should explain
---------------------------------------------------------------------------
clearly why it is doing so.
Other prominent Democratic economists have also advocated
this approach to monetary policy transparency and
accountability. For example, former Vice-Chair of the Federal
Reserve Board, Dr. Donald Kohn, offered the following advice in
a Brookings Institution report:\3\
---------------------------------------------------------------------------
\3\Donald Kohn, ``How should central bankers talk about future
monetary policy? Lessons from the crisis and beyond,'' November 21,
2016. Accessed October 3, 2017 at https://www.brookings.edu/research/
central-bank-talk-about-future-monetary-policy-lessons-from-the-crisis-
and-beyond/.
The Federal Reserve should use the semi-annual monetary
policy report to better explain and focus on its broad
strategy. For some time, as an input to its policy
process, the Committee has been shown the results of a
number of policy rules based on both incoming data and
economic forecasts. And this material has been
accompanied by explanations of why the current and
expected settings of monetary policy might deviate from
---------------------------------------------------------------------------
the rules.
The ``Monetary Policy Transparency and Accountability Act
of 2017'' provides for exactly the type of framework that Chair
Yellen, Dr. Gagnon, and former Vice-Chair Kohn have favorably
described, and does so by requiring the FOMC to annually:
Agree upon a ``monetary policy strategy'' of
its own choosing--that is, a plain English description
of how the Committee's monetary policy instruments
(e.g., short-term interest rates) tend to react to
relevant data;
Adopt at least one but not more than three
reference policy rules of its own choosing; and
Review how actual monetary policies may have
differed from the reference rules.
Much more than an academic exercise, this framework can
fundamentally strengthen our economy by reducing uncertainty
about where monetary policy might go tomorrow, and thus helping
households and businesses make better decisions today.\4\ Dr.
Stephen Cecchetti, who appeared as a Democratic witness before
the Subcommittees on Financial Institutions and Consumer Credit
and Monetary Policy and Trade,\5\ emphasized these benefits in
an article for the St. Louis Federal Reserve bank:
---------------------------------------------------------------------------
\4\A recent study by Federal Reserve Board economists finds that
``uncertainty about monetary policy robustly raise credit spreads and
reduce output.'' Source: Lucas Husted, John Rogers, and Bo Sun (2017).
``Monetary Policy Uncertainty,'' International Finance Discussion
Papers 1215. Available at https://doi.org/10.17016/IFDP.2017.1215.
\5\See the MPT-FI Joint hearing entitled ``Examining the
Relationship Between Prudential Regulation and Monetary Policy at the
Federal Reserve,'' September 12, 2017. Archived webcast available at
https://financialservices.house.gov/calendar/
eventsingle.aspx?EventID=402279.
When people are better informed, they make better
decisions, enhancing the efficiency of the economy in
allocating resources and improving overall welfare. It
would be difficult to find an area of economic life
where this line of argument has carried more weight
than it has in central banking . . . The essence of
good, transparent policy is that the economy and the
markets respond to the data, not to the
policymakers.\6\
---------------------------------------------------------------------------
\6\Stephen G. Cecchetti and Stefan Krause, ``Central bank
structure, policy efficiency, and macroeconomic performance: Exploring
empirical relationships, Review, Federal Reserve Bank of St. Louis,
July/August 2002, p. 47. Accessed at https://files.stlouisfed.org/
files/htdocs/publications/review/02/07/47-60Cecchetti.pdf.
Dr. Donald Kohn, a Brookings Institution Fellow and former
Vice Chair of the Federal Reserve Board of Governors, offered a
similar observation while testifying before the Monetary Policy
and Trade Subcommittee on July 22, 2015:\7\
---------------------------------------------------------------------------
\7\Monetary Policy and Trade Subcommittee hearing entitled
``Examining Federal Reserve reform proposals,'' July 22, 2015. Quoted
from page 8 of the printed hearing, available at https://
financialservices.house.gov/uploadedfiles/114-43.pdf.
Being as systemic, predictable, and transparent as
possible about what the Federal Reserve is doing in
monetary policy increases the effectiveness of policy
because it helps private market participants accurately
anticipate Federal Reserve actions. It enhances your
---------------------------------------------------------------------------
ability to assess the policy's strategies of the FOMC.
And before the full Committee on July 17, 2017, Federal
Reserve Board Chair Yellen testified that:\8\
---------------------------------------------------------------------------
\8\Full-Committee hearing entitled ``Monetary Policy and the State
of the Economy,'' July 12, 2017. Archived webcast available at https://
financialservices.house.gov/calendar/eventsingle.aspx?EventID=402098.
In evaluating the stance of monetary policy, The FOMC
routinely consults monetary policy rules that connect
prescriptions for the policy rate with variables
---------------------------------------------------------------------------
associated with our mandated objectives.
By requiring the Fed's Monetary Policy Report to not only
illustrate how actual monetary policy may have varied from
different policy rules but also provide transparency to why
policy may have varied, households and businesses would (as Dr.
Cecchetti's article emphasizes) ``make better decisions,
enhancing the efficiency of the economy in allocating resources
and improving overall welfare.'' Viewed through the lens of
this and other research and testimony from Committee witnesses,
the Monetary Policy Transparency and Accountability Act offers
a fundamentally sound and bi-partisan approach to giving our
economy a strong hand up.
HEARINGS
The Subcommittee on Monetary Policy and Trade held a
hearing titled ``Examining Federal Reserve Reform Proposals''
to examine matters relating to H.R. 4270 on November 7, 2017.
COMMITTEE CONSIDERATION
The Committee on Financial Services met in open session on
November 14 and 15, 2017, and ordered H.R. 4270 to be reported
favorably to the House without amendment by a recorded vote of
33 yeas to 26 nays (Record vote no. FC-98), a quorum being
present.
COMMITTEE VOTES
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. The
sole recorded vote was on a motion by Chairman Hensarling to
report the bill favorably to the House without amendment. The
motion was agreed to by a recorded vote of 33 yeas to 26 nays
(Record vote no. FC-98), a quorum being present.
COMMITTEE OVERSIGHT FINDINGS
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the findings and recommendations of
the Committee based on oversight activities under clause
2(b)(1) of rule X of the Rules of the House of Representatives,
are incorporated in the descriptive portions of this report.
PERFORMANCE GOALS AND OBJECTIVES
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee states that H.R. 4270
will make Federal Reserve monetary policy decisions easier to
anticipate and understand so that households and businesses can
make better choices about how to spend and invest their
earnings by institutionalizing a policy-communications
framework that reduces uncertainty about economic
opportunities.
NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
CONGRESSIONAL BUDGET OFFICE ESTIMATES
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, January 22, 2018.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 4270, the Monetary
Policy Transparency and Accountability Act of 2017. This cost
estimate supersedes the previous cost estimate for H.R. 4270,
which CBO transmitted on December 5, 2017. This version
corrects an error in the description of the bill's
requirements.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Nathaniel
Frentz.
Sincerely,
Keith Hall,
Director.
Enclosure.
H.R. 4270--Monetary Policy Transparency and Accountability Act of 2017
Current law gives the Federal Reserve's Board of Governors
and its Federal Open Market Committee (FOMC) broad authority to
establish and conduct monetary policy. Twice each year, the
Chair of the Federal Reserve is required to present
Congressional testimony and to report to the Congress
concerning the efforts, activities, objectives, and plans
related to monetary policy.
H.R. 4270 would require the FOMC to establish and describe
an annual strategy for monetary policy that would include a
description of the way that the committee would adjust the
instruments of monetary policy, including an identified primary
instrument, in response to changes in economic indicators. The
bill also would require the Federal Reserve's testimony and
reports to describe at least one reference rule, or
mathematical equation, that would be used as a benchmark for
the conduct of monetary policy, and identify whether and how
actual monetary policy has deviated from that rule.
The bill would directly affect revenues through the
operations of the Federal Reserve System, which remits its net
earnings to the Treasury; those remittances are classified as
revenues in the federal budget. CBO estimates that enacting
H.R. 4270 would increase costs of the Federal Reserve starting
in 2019 and thus decrease federal revenues by $8 million over
the 2018-2027 period. Those higher costs reflect, in
particular, CBO's anticipation that the Federal Reserve would
implement the bill by hiring a small number of additional staff
to modestly expand its current work on monetary policy rules
and to coordinate across the offices of the members of the
FOMC, including the associated regional Federal Reserve Bank
presidents.
The Statutory Pay-As-You-Go Act of 2010 establishes budget-
reporting and enforcement requirements for legislation
affecting direct spending or revenues. The net changes in
revenues that are subject to those procedures are shown in the
table below. CBO estimates that enacting H.R. 4270 would not
affect direct spending.
CBO'S ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 4270, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON FINANCIAL SERVICES ON NOVEMBER 14, 2017
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
-------------------------------------------------------------------------------------------
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2018-2022 2018-2027
--------------------------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE OR DECREASE (-) IN THE DEFICIT
Statutory Pay-As-You-Go Impact.............................. 0 1 1 1 1 1 1 1 1 1 3 8
--------------------------------------------------------------------------------------------------------------------------------------------------------
CBO estimates that enacting H.R. 4270 would not affect net
direct spending or increase on-budget deficits by more than $5
billion in any of the four consecutive 10-year periods
beginning in 2028.
H.R. 4270 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act and
would impose no costs on state, local, or tribal governments.
This cost estimate supersedes the previous cost estimate
for H.R. 4270, which CBO transmitted on December 5, 2017. The
prior estimate erroneously indicated that the bill would
require that the FOMC establish a mathematical description of
the way that the committee would adjust the instruments of
monetary policy. This revised cost estimate corrects the
description of H.R. 4270 but does not change the estimated cost
of the bill.
The CBO staff contact for this estimate is Nathaniel
Frentz. The estimate was approved by John McClelland, Assistant
Director for Tax Analysis.
FEDERAL MANDATES STATEMENT
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995. The Committee has
determined that the bill does not contain Federal mandates on
the private sector. The Committee has determined that the bill
does not impose a Federal intergovernmental mandate on State,
local, or tribal governments.
ADVISORY COMMITTEE STATEMENT
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
APPLICABILITY TO LEGISLATIVE BRANCH
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
EARMARK IDENTIFICATION
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
DUPLICATION OF FEDERAL PROGRAMS
In compliance with clause 3(c)(5) of rule XIII of the Rules
of the House of Representatives, the Committee states that no
provision of the bill establishes or reauthorizes: (1) a
program of the Federal Government known to be duplicative of
another Federal program; (2) a program included in any report
from the Government Accountability Office to Congress pursuant
to section 21 of Public Law 111-139; or (3) a program related
to a program identified in the most recent Catalog of Federal
Domestic Assistance, published pursuant to the Federal Program
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No.
98-169).
DISCLOSURE OF DIRECTED RULEMAKING
Pursuant to section 3(i) of H. Res. 5, (115th Congress),
the following statement is made concerning directed rule
makings: The Committee estimates that the bill requires no
directed rule makings within the meaning of such section.
SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION
Section 1. Short title
This Section cites H.R. 4270 as the Monetary Policy
Transparency and Accountability Act of 2017.
Section 2. Monetary policy transparency and accountability
This section provides for the publication of a plain
English, non-technical, description of how the FOMC expects
monetary policy to change with incoming data and forecasts, and
testify on how the actual conduct of monetary policy compares
to a small set of reference rules of the FOMC's own choosing.
CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
H.R. 4270 does not repeal or amend any section of a
statute. Therefore, the Office of Legislative Counsel did not
prepare the report contemplated by clause 3(e)(1)(B) of rule
XIII of the Rules of the House of Representatives.
MINORITY VIEWS
H.R. 4270 requires the Federal Reserve to adopt ``exactly
one'' monetary policy strategy and between one and three policy
rules on an annual basis that must be compared against the
actual conduct of monetary policy.
The language calling for ``exactly one'' strategy is
perhaps one of the most troubling aspects of the bill, which
has the potential to undermine or curtail the Federal Reserve's
dual mandate, particularly the full employment aspect, which is
not mentioned at any point in the bill. Read literally, the
language appears to require the Federal Reserve to choose
between full employment and price stability. Given the litany
of Republican members that have called for the Federal Reserve
to drop its focus on full employment in other contexts, the
``exactly one'' language raises significant concerns that
warrant a cautious approach to meddling with the Federal
Reserve's monetary policy objectives. A single strategy could
also be interpreted to prevent the Federal Reserve from
targeting specific, impaired, sectors of the economy, as the
Federal Reserve did effectively as part of its most recent
stimulus program.
Codifying an obligation for the Federal Reserve to
reference one to three simplistic policy rules could also have
unintended and unfortunate consequences.
First, doing so could result in an overreliance on simple
rules, which by their nature fail to account for the complexity
within the U.S. economy that policy makers currently take into
account in setting monetary policy. As former Vice Chairman of
the Federal Reserve, Donald Kohn, has previously cautioned,
``no rule can embody the complexities of the real world in a
few variables--and efforts to do so will only hamstring the Fed
from reacting to developments, especially when the real world
takes unexpected turns outside of historical experience.''
Second, putting reference policy rule requirements into law
could easily serve to discourage Federal Reserve policymakers
from deviating from the simplistic rules-based policy
prescriptions, even when a failure to do so could have
significant adverse consequences on the wealth and well-being
of hard-working American families. For example, in the
aftermath of the 2008 financial crisis, the Federal Reserve has
consistently targeted a level for short-term rates that is well
below the level called for by many reference rules. Had the
Federal Reserve followed the simplistic prescriptions of a
number of the most frequently referenced policy rules and
prematurely raised rates, it could have slowed the recovery,
reduced employment opportunities, and otherwise inflicted
economic pain on American households and businesses.
Despite taking swift, bold, and unprecedented steps which
were key to our economy's recovery, Republicans have frequently
attacked the Federal Reserve's conduct of monetary policy,
making monetary policy the scapegoat for their own failed
fiscal policies which slowed the economy's progress and
undercut the Federal Reserve's efforts. Creating a legal
requirement that discourages such bold action should be
rejected.
While Republicans argue that the legislation is needed to
increase accountability and transparency, both of which are
noble objectives, Federal Reserve officials already conduct the
type of open and transparent communication that this bill calls
for.
For each of these reasons, we oppose H.R. 4270.
Maxine Waters.
Daniel T. Kildee.
Michael E. Capuano.
Stephen F. Lynch.
Nydia M. Velazquez.
Keith Ellison.
Joyce Beatty.
Al Green.
Wm. Lacy Clay.
Carolyn B. Maloney.
Ruben J. Kihuen.
[all]