Breaking News Emails
In the letter sent on Monday, Yellen called the proposed law a "grave mistake," that would undermine Fed policy and the greater U.S. economy.
"Unfortunately, the FORM Act attempts to increase transparency and accountability through misguided provisions that would expose the Federal Reserve to short-term political pressures," she said.
"The bill would severely impair the Federal Reserve's ability to carry out its congressional mandate and would be a grave mistake, detrimental to the economy and the American people."
The Fed Oversight Reform and Modernization Act (FORM) could cause "millions of Americans to suffer" and would "politicize monetary policy," Yellen said.
The proposed law in Congress would require the central bank to tie interest rate policy to a mathematical rule. It could see a vote in the House of Representatives this week.
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.
"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.
Some congressional Republicans have pressed for the Fed to adopt rules and justify to Congress in a policy "audit" any cases where rate decisions deviate from that rule.
The proposals, including the one under consideration this week, are not expected to become law, but have nonetheless prompted a host of Fed policymakers to air their concerns in public.
FORM, Yellen wrote, includes an audit provision that is "based on a false premise." The law could curb the Fed's ability to act in a crisis, she added.
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," Yellen said.
— Reuters contributed to this report.