Republican Sen. Pat Toomey said the Federal Reserve has lost its credibility and it’s time to end the central bank’s "subjective" moving of the goal post on interest rates.
He said it's "unbelievable" that interest rates remain so low.
"The Fed no longer has credibility, and you can see that,”
the Pennsylvania Republican told CNBC.
“The divergence between the futures markets and the Fed's own projections about what they're going to do about interest rates — this is a huge problem," he said.
Toomey’s comments came a day after Federal Reserve Chair Janet Yellen resisted calls for more congressional oversight, as members of a House of Representatives panel criticized the central bank's policies and pressed it to be more accountable.
Toomey has called on the central bank to adopt a rule that would lay out how it will set monetary policy. Under such a rule, the Fed would have to explain itself to Congress were it to deviate from its plan.
"I've never been wild about the idea of giving Congress control over monetary policy, but after seeing what this Fed has been doing for these many years now, I'm not so sure it would be any worse," Toomey said.
"In any case, I'm not suggesting that Congress get up every morning and set the fed funds rate, but why not have the Fed adopt a rule?"
In her semiannual testimony to Congress, Yellen repeated her view that the Fed will likely hike interest rates later this year if the U.S. economy expands as expected, and cited improvement in the labor market.
Yellen downplayed the importance of the timing of the first rate hike as she delivered the Fed's mid-year economic outlook to Congress. Interest rates will remain at very low levels "for quite some time after the first increase," she said.
The Fed's benchmark rate has been at a record low near zero since December 2008. That has translated to historically low borrowing rates for consumers and businesses.
Many economists peg September for a rate liftoff, but they see at most only two quarter-point moves this year.
But in the hearing before the House Financial Services Committee, monetary policy took a backseat to central bank transparency. While some lawmakers aggressively questioned Yellen, it was a gentler session than the grilling she received before the same panel in February.
The most heated exchange occurred when Representative Sean Duffy, a Wisconsin Republican, lambasted the Fed and Yellen for what he described as a failure to properly respond to the 2012 leak of sensitive information to a private financial newsletter.
Duffy pressed Yellen to explain why the Fed has failed to meet the House panel's demands to release documents related to the case.
"We've said that we plan to give (the documents) to you as soon as we're able to do so and not compromise an open criminal investigation," Yellen responded. "We want to see this investigation succeed."
Yellen added that the Fed has a clear set of rules to follow in the event of an alleged leak, but Duffy shot back that the central bank has failed to follow those rules.
"If anyone is trying to sweep this under the rug, it's the Fed," Duffy said, demonstrating the frustration that Republican and some Democratic lawmakers have felt over the case.
Republican lawmakers in particular have sought to rein in the central bank's authority, disturbed by the quadrupling of its balance sheet, its wide impact on the economy and the broad regulation powers it has accumulated since the 2008 financial crisis.
Texas Republican Jeb Hensarling, the committee's chairman, demanded the central bank be more predictable and implored it to cooperate with the leak investigation. "The Fed is not above the law," Hensarling said during his opening remarks.
Many Republican lawmakers urged Yellen to consider supporting changes in how the Fed operates, such as adopting a rule that would link rate hikes to changes in economic growth and inflation.
Hensarling said a simple rule would make the Fed more predictable and understandable and help an economy "mired in lackluster, halting economic growth."
Yellen, however, rejected the idea.
"There is not a central bank in the world that follows a rule that would rely on only two variables," she said.
Meanwhile, some policymakers and economists believe the Federal Reserve is waiting too long to raise short-term interest rates, which have stood at a record low since December 2008.
Esther George, president of the Kansas City Fed, says the central bank is repeating its policy mistake of 2004,
the Financial Times reports. The central bank, led then by former Chairman Alan Greenspan, let inflation rise "persistently" above 2 percent and the job market over-expand "amid one of the most historic credit bubbles in U.S. history," she said.
The situation may look different now, but "economic trends and experience suggest otherwise," George said. She wants the Fed to act on rates now.
The personal consumption expenditures index, the Fed's favored inflation gauge, climbed only 0.2 percent in the 12 months through May. But the unemployment rate fell to a seven-year low of 5.3 percent in June.
Jim O’Sullivan of High Frequency Economics also thinks the Fed is moving too slowly. "They are a bit behind the curve," he told the FT. “They are being risk-averse and erring on the side of starting late, but by many standard models they should have started tightening before this.”
(Reuters and the Associated Press contributed to this report).
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