Obama-fying The Fed?

With big changes afoot at the Federal Reserve, the nation's capital is suddenly abuzz with chatter that President Barack Obama will have significant influence over the central bank's future.

Not only is Congress considering shaking up the Fed's regulatory duties, Obama will have the opportunity to appoint three new members of the bank's Board of Governors, due to two vacancies and the recent announcement that Fed Vice Chairman Donald Kohn will step down in June.

But talk about the administration's influence is overblown, says former Dallas Fed President (and Forbes.com contributor) Bob McTeer. "It's been my experience that once somebody comes to the Board of Governors, they sort of become technocrats," he says, adding that most decisions by the board are made after much discussion by the governors and briefings by well-informed Fed staff. "I think the fact that Obama will be making the appointments will not make a lot of difference."

In fact, more influence over the central bank is likely to lie with lobbyists and lawmakers. Members of the Senate Banking Committee have been considering a deal that would establish a consumer protection division--headed by a political appointee--within the Federal Reserve. Such an agreement would keep financial products and banks under the same regulator, a position supported by the Financial Services Roundtable, an industry group whose members include heavyweights like Bank of America, Citigroup and Nationwide.

But K Street is also eyeing the compromise with caution, for a variety of reasons. Ryan McKee, senior director of the U.S. Chamber of Commerce's Center for Capital Markets, says the chamber is concerned about overlapping authority with other regulators, no matter which agency houses the consumer protection agency. John Taylor, president and chief executive of the National Community Reinvestment Coalition, calls the plan a "waste of taxpayers' money" since the Fed has a track record of laxity in enforcing its existing authority.

"Had the Fed exercised their authority and enforced consumer protections, they could have nipped the foreclosure crisis in the bud," says Taylor.

Despite the reported deal, both sides are likely to have plenty of time to make their cases. Even if senators can finalize a deal soon on the structure of a consumer protection authority--and that's a big if--it could be weeks before a financial regulatory bill comes to the Senate floor for a vote. Then the Senate's bill would have to be reconciled with the House of Representatives' somewhat different financial regulatory overhaul bill, passed in December--also a potentially lengthy and difficult process.

Meantime, watch out for too much meddling from members of Congress. "They really don't arm themselves with much information and understanding" on financial issues, says McTeer. Of particular concern, he says, the possibility of an audit of the Fed's monetary policy by the Government Accountability Office. Such a proposal was part of the House-passed financial regulatory bill in December.

"That's just sending somebody in to second guess the monetary policy decisions," says McTeer.