By Jason Lange
WASHINGTON (Reuters) - The White House on Tuesday issued a veto threat for a Republican-backed bill to make the Federal Reserve set interest rate policy using a mathematical rule, a proposal Fed Chair Janet Yellen said would "severely damage" the U.S. economy.
The Obama administration opposes the proposal because it would hinder the Fed's ability to help the economy, the White House said in a statement.
"If the president were presented with (the legislation), his senior advisors would recommend that he veto the bill," the statement said.
Lawmakers in the U.S. House of Representatives cleared the way on Tuesday for vote on the bill, called the Fed Oversight Reform and Modernization Act, as soon as Wednesday.
The proposal, which could pass the Republican-controlled house, is not expected to become law but has nonetheless prompted a host of Fed policymakers to air their concerns.
Under the type of policy rule envisioned by lawmakers, the Fed would commit to moving interest rates up or down depending on the readings of economic indicators like the jobless rate and inflation.
In a letter to lawmakers, Yellen said the proposed law would hamstring the Fed's ability to respond to crises and would also be an intrusion on its independence.
This would "likely lead to an increase in inflation fears and market interest rates, a diminished status of the dollar in global financial markets, and reduced economic and financial stability," she said.
She argued that policymakers do not understand the economy well enough to come up with a rule that would reliably guide the economy through its ups and downs.
"There is no consensus among economists or policymakers about a simple policy rule that is best suited to cover a wide range of scenarios," Yellen said.
Republican Representative Jeb Hensarling, who heads the House Financial Services Committee, said the proposal would make the Fed more "accountable and transparent." Any deviation from an interest rate policy rule would lead to a congressional audit.
In her letter addressed to Republican Paul Ryan, who recently became House Speaker, and the Democratic Leader in the House, Nancy Pelosi, Yellen said the Fed Oversight Reform and Modernization Act "would politicize monetary policy and bring short-term political pressures into the deliberations of the" Fed.