* Reform bill restricts Fed mostly to Treasuries, repos
* Measure would end Fed's direct influence in housing sector
* Consumer Financial Protection Bureau funding targeted
By David Lawder
WASHINGTON, March 2 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
Under the bill's bond purchase provision, 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 to fight inflation, under the
Brady bill would be stripped of the jobs mandate and be
refocused to controlling inflation and maintaining the
purchasing power of the dollar.
According to a bill summary 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
Agency 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 1930s Great
Depression, is seldom used today and 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.