Forget the Taylor Rule, maybe the Fed will start following the Yellen Rule.
Federal Reserve Chair Janet Yellen was on Capitol Hill on Wednesday to deliver her semiannual monetary report before the House Financial Services Committee.
And some members of congress again pressed the Fed to follow rules.
And while this usually means urging the Fed to follow some version of the “Taylor Rule,” on Wednesday, Rep. Bill Huizenga (R-MI) offered to create a Yellen Rule, if it would encourage the Fed to being following a defined rule.
“We’re not trying to handcuff you, but we are asking that you write a rule within descriptive parameters to use as a reference point — purely use it as a reference point,” said Huizenga, who chairs the committee’s Subcommittee on Monetary Policy and Trade.
Huizenga went on to say that Yellen would have the power to create her own parameters for any concerns she might have, such as negative interest rates.
“We won’t call it the Taylor Rule, we’ll call it the Yellen Rule,” Huizenga offered, so that the United States could have “some predictability” in regards to Fed action.
The “Taylor Rule” — named for economist John Taylor — is a formula for central banks like the Federal Reserve that determines what nominal interest rates should be based on things like inflation and economic output. And so whereas now the Fed sets interest rates based on its interpretation of a variety of economic data, the Taylor Rule would be a hard prescription for how to set policy.
Yellen told Huizenga that the Federal Reserve follows a systematic policy, and that the forecasts and intentions of FOMC members are outlined in their statements. Yellen added that no central bank follows a definite rule, and she would not want the Fed to be the first.
“I don’t agree that a rule-based policy is the best way to go,” Yellen responded. “There is not a single central bank in the world that follows a rule that would rely on only two variables.”
Yellen added that, “I would strongly resist agreeing to follow any rule where the stance of monetary policy depends on only the current readings of two economic variables.”