FED FOCUS-Bid to clip Fed's wings gains support in Congress

By Alister Bull

WASHINGTON, July 8 (Reuters) - A proposal from a long-time congressional foe of the Federal Reserve that could give lawmakers sway over monetary policy has won the support of a majority in the House of Representatives, alarming officials at the U.S. central bank.

The Federal Reserve Transparency Act of 2009, put forward by Republican Representative Ron Paul of Texas, now has 250 co-sponsors in the House. It will get air-time on Thursday during a congressional hearing on Fed independence that will feature testimony from the Fed's No. 2 official, Donald Kohn.

Public anger over the trillion dollars the Fed has put into play to battle the financial crisis and bail out investment bank Bear Stearns and insurer American International Group (AIG.N) has created a backlash and calls for more accountability.

A proposal from President Barack Obama to put the Fed in charge of monitoring risks to the entire financial system has intensified the scrutiny.

Paul has tapped into this anger and put forward a 2-1/2 page bill that would explicitly repeal a provision of law that prohibits the Government Accountability Office, a government watchdog agency, from auditing monetary policy decisions.

Fed officials see this as a dangerous intrusion on their independence that could hinder their ability to make the best long-term decisions for the economy.

Paul, however, thinks Congress needs more control.

"Why should they be independent? Independence to them means secrecy, do whatever they want, spend billions of dollars, bail out their friends," Paul told Reuters Television.

Paul's bill, which is co-sponsored by 78 Democrats, would also expose Fed transactions with foreign central banks, Fed emergency lending operations and discussions between Fed officials to scrutiny by the GAO, which can offer policy suggestions to lawmakers.

To become law, the bill would need to win support from the House Democratic leadership, who have yet to show an appetite to move the bill. It would then have to pass the Senate, where support would likely be scarcer.

But analysts say Congress is unusually sensitive to the public mood in the wake of the crisis and say the bill must be taken seriously.

"This is the most populist Congress that we've seen in decades and legislation like this can quickly gain momentum if it is ignored," said Jaret Seiberg, a financial services policy analyst at the Washington Research Group.

Citing the recent congressional clamor over executive compensation and new rules on credit cards, he said Democratic leaders may be wary of blocking legislation they feel is picking up popular support.

"This Congress has shown that when the electorate is upset it will act extraordinarily quickly ... This should not have any legs at all, and the fact that it does shows how populist this Congress has become," Seiberg said.

The Fed, for its part, is taking Paul very seriously.