Last week, in addition to testimony that Fed Chairman Janet Yellen gave the Senate Banking Committee regarding her views on interest rates, the economy, inflation, and the job market, she also testified before the House Financial Services Committee where she pushed back against a proposal to change the way the Fed administers its benchmark federal funds rate.
Although Federal Reserve members are nominated by the president and must be approved by a majority in the United States Senate in order to serve at the central bank, the Fed operates as an independent body and it administers monetary policy without intrusion from the president or Congress. For years, a small number of congressmen have attempted to pass a bill that would allow Congress to exert more influence over the Fed, but have repeatedly failed in these efforts. Now, House members have introduced another bill that would restrict the Fed’s independence by limiting its ability to act on its own when changing interest rates. Specifically, the proposed bill would require the Federal Reserve to use a mathematical formula to determine the appropriate level for the federal funds rate. The bill’s proponents argue that this rule would help the Fed fulfill its dual mandate of maintaining price stability and fostering full employment by making it simpler to manage monetary policy and making it easier for economic actors to determine when rate shifts will occur, which in turn will facilitate better planning on their end and more efficient results that will benefit the economy as a whole. They also point to the “Taylor Rule” to demonstrate that it is possible to devise a formula that can manage interest rate changes effectively. The Taylor Rule was created by Stanford economics professor John Taylor, and he also testified at the hearing where he stated that if the Taylor Rule was being followed today, the federal funds rate would be above 1% in contrast to the 0% to .25% level that the Fed has kept it at since 2008.
While Jeb Hensarling, the chairman of the House Financial Services Committee, would like to see the proposed bill become law, it is extremely unlikely that this will happen. Chairman Yellen adamantly opposed it at the hearing and made it clear that not only would it lead to political interference in the Federal Reserve’s affairs, but it would also restrict its independence and reduce its ability to act quickly and nimbly during times of crisis. Furthermore, while the Fed has always had its fair share of critics, many of them have been quick to acknowledge that while the Fed might not be perfect, one of its attributes is its independence and that is something that should be maintained. For these reasons and due to a lack of widespread support in Congress, the proposed bill that was discussed at the hearing is unlikely to become law in the foreseeable future.
Although the Fed has kept interest rates at or near zero for over 5 years, the general consensus is that improvements in the economy and recent growth in the job market will force the central bank to raise them next year. Before this happens, senior housing providers and investors who are seeking inexpensive capital for growth, acquisitions, or other needs, should contact the Chicago-based financing firm Cambridge Realty Capital to learn more about the many different financing programs that it offers for these and other purposes.