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In Republican Attacks on the Fed, Experts See a Shift

WASHINGTON — At a hearing in February, Representative Scott Garrett, a New Jersey Republican, complained that Congress and the Federal Reserve had traded places.

During previous periods of high unemployment, members of Congress pressed the Fed to print more money even as the Fed remained wary of the inflationary consequences of such efforts.

After the Great Recession, by contrast, the loudest criticism has come from politicians demanding that the Fed shut down its printing press and raise interest rates.

Republicans like Mr. Garrett argue the central bank needs to be reined in because they say it has abandoned caution in its continuing effort to stimulate faster economic growth. They say the Fed was granted considerable autonomy so it could keep inflation under control, and it is now abusing that independence.

“The people pushing back on your decisions are those arguing for a tougher monetary policy, not a looser one,” Mr. Garrett told Janet L. Yellen, the Federal Reserve chairwoman, during the hearing in late February. “This flies in the face of the original stated rationale for political independence in monetary policy.”

The Fed has long been a popular target for politicians during periods of economic distress. Sarah Binder, a political scientist at George Washington University, has shown that congressional prodding of the Fed rises and falls with the unemployment rate.

But she also found a striking shift: Democrats once proposed most bills to change the Federal Reserve but in recent years Republicans have taken their place, offering about two-thirds of such measures since 2010.

The Fed’s chairman for most of that period, Ben S. Bernanke, was a Republican initially appointed by a Republican president. Under his leadership, the Fed reduced interest rates nearly to zero and embarked on several rounds of highly unusual “quantitative easing,” amassing more than $4 trillion in Treasury and mortgage-backed securities in a bid to further reduce borrowing costs for business and consumers.

Easy-money policies like those pursued by Mr. Bernanke and continued by Ms. Yellen historically have drawn support from populist politicians in both parties. But Ms. Binder suggested that Republicans were attacking those policies in part because Democrats had supported the Fed’s efforts to fight unemployment, and the polarization of national politics encouraged the parties to accentuate their differences.

“You now have these hard-money populists from the right who are concerned that monetary policy has been too lax and that the Fed needs to tighten,” Ms. Binder said. “It’s an inversion of what we might more typically see.”

One proposal, which the House has passed twice in recent years, is known as “Audit the Fed.” Backed by Senator Rand Paul, a Kentucky Republican who is running for president, it would authorize the Government Accountability Office to review monetary policy decisions.

A stronger measure, backed by the Republican leadership of the House Financial Services Committee, would require the Fed to publish a mathematical formula that it planned to follow in raising and lowering interest rates. The Fed would then be required to explain deviations from the path prescribed by the formula.

There are also proposals to change the selection process for members of the Fed’s policy-making committee, including a plan to strengthen the role of the banking industry in picking the presidents of the Fed’s 12 regional reserve banks.

So far, however, none of the measures have gained traction in the Senate, where Democrats still have considerable power to stall legislation. And the White House has expressed general opposition to restrictions on the Fed’s autonomy.

The Fed is charged by Congress with minimizing inflation and maximizing employment, a mandate formalized in 1978 by the Humphrey-Hawkins Act. Since the Great Recession, inflation has been unusually slow while jobs have been unusually scarce. Ms. Yellen and other Fed officials have described the Fed’s actions as a necessary response to those circumstances.

Democrats, rallying to the Fed’s defense, say the central bank is doing its best to fulfill
its twin objectives, which can sometimes pull in opposite directions. Republicans, they say, are seeking to change its job description.

“The root of the issue at this point, I can sum it up in two words, Humphrey and Hawkins,” said Barney Frank, the former Massachusetts congressman. “What you have is a vehement objection to the dual mandate. Many Republicans do understand that the atmospherics of repealing the unemployment part of the dual mandate would be very bad, but they are opposed to it philosophically.”

Some Republicans are in favor of directing the Fed to focus solely on price stability, in line with the operating instructions for most central banks in developed nations, including the European Central Bank and the Bank of Japan. The Republican senators Bob Corker of Tennessee and David Vitter of Louisiana introduced legislation in 2013 that directed the Fed to focus on keeping inflation low.

Bills being put forward now, however, do not attack the dual mandate directly. The proposal to make the Fed adopt a policy rule, for example, includes a baseline rule that incorporates both inflation and a measure of economic output. But that rule, known as the Taylor Rule, suggests that the Fed has kept interest rates near zero for too long, and the bill would require the Fed to justify that choice.

John Taylor, a professor of economics at Stanford University and the intellectual force behind the legislation, said that requiring the Fed to establish a policy rule would serve the same purpose as the checklists that some hospitals use to help doctors avoid errors.

“Practical experience and empirical studies show that checklist-free medical care is wrought with dangers just as rules-free monetary policy is,” Mr. Taylor wrote in a recent defense of his proposal.

The proposal also is intended to increase the Fed’s accountability. “What you want is something that permits you to see that the policies that are carried out are carried out for the benefit of the public,” said Allan Meltzer, an economist at Carnegie Mellon University. “So choose your strategy, and we monitor you.”

The House Financial Services Committee passed the legislation along party lines last year, but it went no further. The author, Representative Bill Huizenga, a Michigan Republican who heads the monetary policy subcommittee, said in a statement that he remained determined to “bring the Federal Reserve out of the shadows” and that he planned to introduce a modified version of the legislation later this year.

Fed officials say that they do consult rules in their deliberations, but that central banking is the art of knowing when to deviate from those rules. Mr. Bernanke said recently at the Brookings Institution that the Fed had articulated a policy rule: targeting 2 percent annual inflation and maximum employment.

“I don’t think you can get much more precise than that because I don’t think you can deal with the uncertainties that arise in actual policy-making,” he said.

The legislation would allow the Fed to change its policy rule as often as it liked, but opponents of the measure still worry that it would inhibit the Fed’s flexibility.

“Law can be very sticky,” said Peter Conti-Brown, a scholar of central banking at Stanford Law School. “The thing that I fear about a statutory policy rule is that it would get stuck in inertia and make it very difficult to deviate even if there was a consensus among economists that there should be that deviation.”

The current debate also has revived a struggle that dates to the Fed’s creation in 1913. Republicans want to strengthen the independence of the Fed’s regional reserve banks, whose presidents participate in monetary policy decisions, while Democrats want to strengthen the federal government’s control.

Legislation introduced by Mr. Garrett would let the regional banks select their own boards and increase the banking industry’s representation on those boards. It would also let the banks pick presidents without Washington’s approval.

A countervailing bill introduced by Senator Jack Reed, a Rhode Island Democrat, would make the president of the New York Fed a presidential nominee, subject to confirmation by the Senate. A coalition of community groups is pressuring the Fed to allow public input in the selection process for all regional Fed presidents.

Most of these proposals are revivals of earlier legislation, from earlier periods of frustration, and Mr. Conti-Brown said it was quite likely nothing would change.

“I think chances are strong that if the recovery holds, then even though the Fed after the crisis is a much bigger and more powerful institution, the Fed will slink back into the shadows,”
he said. “People like me are just going to be talking to other academics and central bankers and won’t be talking to the public anymore.”

A correction was made on 
April 7, 2015

Because of an editing error, an earlier version of this article misstated the month in which Representative Scott Garrett complained that Congress and the Federal Reserve had traded places. It was February, not last month.

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A version of this article appears in print on  , Section B, Page 1 of the New York edition with the headline: The Fed Under Siege. Order Reprints | Today’s Paper | Subscribe

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