* Reform bill restricts Fed mostly to Treasuries, repos
* Measure would end Fed's direct influence in housing sector
* Consumer Financial Protection Bureau funding targeted
(Adds background, details on competing Democratic proposal)
By David Lawder
WASHINGTON, March 2 (Reuters) - Republican legislation
to limit the Federal Reserve's mandate to fighting inflation
would restrict the types of bonds the U.S. central bank could
buy and potentially force sooner-than-expected sales of
Aides to Representative Kevin Brady said on Friday his
reform bill would allow the Fed to invest only in U.S. Treasury
debt and repurchase and reverse-repurchase transactions used to
add or drain banking system reserves except during emergencies.
Brady, a long-time Fed critic and chairman of the Joint
Economic Committee of Congress, plans to formally introduce his
"Sound Dollar Act" on Monday.
The Brady bill brings together a series of reforms that
address congressional Republicans' complaints that the Fed
emerged from the financial crisis with too much power, and has
strayed into fiscal policy and credit allocation while
perpetuating expectations it will bail out the largest financial
The bill is unlikely to clear Congress, where Democrats who
control the Senate will be reluctant to drop the Fed's mandate
to focus on full employment.
Still, the measure represents an important marker that could
set the tone for legislation on the Fed if Republican political
power grows in November elections.
Democrats have also sought changes to the Fed system, which
came under harsh criticism during the financial crisis over Wall
Street bailouts and lax supervision of lending practices. The
leading Democrat on the House Financial Services Committee, Rep.
Barney Frank, is considering legislation that would take the
votes away from five regional Fed bank presidents in policy
decisions and give them to five officials appointed by the
Democrats have long raised concern about the accountability
of regional Fed bank presidents, who are appointed by banks and
business people in their regions and not subject to Sentate
Frank's measure is also unlikely to gain traction because of
a divided Congress and because the Massachusetts lawmaker is not
seeking reelection in the fall.
TARGETING CONSUMER PROTECTION
Under the bond-purchase provision of Brady's bill,
aimed at keeping the Fed from "picking winners and losers
through the allocation of credit among households, firms and
sectors," the Fed would be able to buy other types of assets
during a crisis, but would have to liquidate these within five
years, aides said.
The Fed took increasingly aggressive, emergency measures to
stimulate the economy as the financial crisis weighed, including
the purchase of around $1.25 trillion in mortgage-backed
securities as part of its purchase of $2.3 trillion in assets.
The Fed has been reinvesting the proceeds of maturing
mortgage bonds into that market to try to ignite home purchases
Financial markets recently have been scrutinizing remarks by
Fed Chairman Ben Bernanke for any signs that he may be looking
more seriously at another major round of bond purchases, which
could include mortgage-backed securities.
The Fed, which has had a long-standing dual mandate to
promote maximum employment and fight inflation, under the Brady
bill would be stripped of the jobs mandate.
The Brady bill, if it became law, would refocus the Fed on
controlling inflation and maintaining the purchasing power of
Last month, the Fed announced an explicit target
of 2 percent inflation. While an inflation target has been a
long-standing goal of Bernanke's, the move was timed to
underscore the bank's commitment to keeping inflation at bay
even as it reaches for additional ways to loosen financial
In setting a target for inflation, the Fed acknowledged that
it could not set a similar goal for employment because the
maximum level of employment is determined by a range of factors
affecting labor markets that can change over time.
According to a summary of Brady's bill released on Friday,
the inflation-only mandate would require the Fed to monitor a
broad range of asset prices, such as the dollar's value, gold
prices and real estate, in order to avoid the kind of bubble
that led to the 2007-2009 financial crisis.
The Fed would also have to report to Congress on the impact
that its monetary policy decisions have on the dollar's value.
Other details of the bill released on Friday included a
provision to subject the new Consumer Financial Protection
Bureau to the normal congressional appropriations process.
Currently, the CFPB gets its funding from the Federal Reserve.
If the change were enacted, it could make the agency, widely
despised by Republican lawmakers, more vulnerable to efforts to
limit its regulatory scope by de-funding it.
The bill also would liquidate any assets in the Exchange
Stabilization Fund that are not made up of special drawing
rights from the International Monetary Fund. The $50 billion
Exchange Stabilization Fund, launched during the Great
Depression in the 1930s, is seldom used today. Brady's aides
called it a "slush fund" for the U.S. Treasury secretary.
Former Treasury Secretary Henry Paulson used it to backstop
money market mutual funds in 2008, while his successor, Timothy
Geithner, has tapped the fund to stay under the U.S. debt limit
in recent months.
(Additional reporting by Mark Feselenthal; Editing by Leslie
Adler and Jan Paschal)
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