"Monetary policy cannot and should not be geared toward large banks based primarily in New York and policy makers in Washington," said Sen. Kay Bailey Hutchison, R-Texas, an author of the measure. "The Federal Reserve needs insight to the health of our banking system and economy as a whole."
Additionally, the Senate voted 96-0 on Tuesday for a watered-down version of a provision subjecting the Fed to a one-time audit of itsrole making cheap loans to ailing Wall Street banks during the financial crisis. The original, more controversial, measure would have subjected the Fed to ongoing congressional investigations.
Last year, tension reigned between the Fed and Congress, with lawmakers particularly angry about the Fed's role in the Wall Street bailouts.
The Fed pushed to keep secret taxpayer payments made to those who had contracts with bailed out insurer American International Group (AIG, Fortune 500). The Fed also took heat for its role in keeping together the Bank of America deal to purchase Merrill Lynch, which resulted in another bailout.
Congress also blamed Bernanke for ignoring early warning signs that the economy was in trouble.
"There have been points in this whole financial reform process when there's been disheartening developments, thanks to populist arguments," said Karen Dynan, a former senior adviser at the Fed who now works at the Brookings Institution. "But these steps are founded in good policy logic."
Banking supervision: Last November, the Senate planned to strip the Fed of all banking supervision powers, which went further than anything the House had in store for the central bank, according to a first draft of Wall Street reform.
In March, the Senate Banking Committee released a second draft that left the Fed in charge of the nation's largest banks. The bill would have moved oversight of state-chartered banks with assets less than $50 billion to the Federal Deposit Insurance Corp.
In both cases, Sen. Christopher Dodd, D-Conn., who runs the banking committee, said he didn't intend to punish the Fed, but he wanted to free it to focus on monetary policyand the biggest banks that posed the most risk to the financial system.
Currently, banks can now choose their supervisor, either the Fed or the FDIC.Big and small banking groups lobbied to keep it that way.
"People were looking around for who to blame, particularly in the regulatory sphere," American Bankers Association spokesman Wayne Abernathy said. "Now people realize the banking system is far more complex."
It was clear Wednesday that the amendment would pass when Dodd said he opposed the move to keep the Fed's powers the same but declined to talk more about it.
"As far as the community banks were concerned, the Fed was doing a good job," said Steve Verdier, senior lobbyist for the Independent Community Bankers of America.
Audits: In a move championed by former presidential candidate Rep. Ron Paul, R-Texas, the House's regulatory reform bill allowed Congress to order its investigator, the Government Accountability Office, to audit Fed activities. The Fed has opposed this, saying it would interfere with the central bank's ability to carry out independent monetary policy.
The Senate considered a similar measure, sponsored by Sen. Bernard Sanders, I-Vermont.
But the Senate decided unanimously to cull it back to a one-time audit of the Fed's role in the financial crisis. The audit will also disclose the terms of the Fed's emergency loans.
"This amendment makes it clear that the Fed can no longer operate in the kind of secrecy that is has operated in forever," Sanders said on Tuesday.
Emergency loan powers: The one area where the Senate appears to remain tougher on the Fed is in trying to curtail the central bank's powers to step in as a lender of last resort.
Congress would continue to allow the Fed to be able to step in and make loans in emergency situations. However, under a bipartisan agreement released last week, those powers would be trimmed to ensure that the Fed only swoops in when banks need access to credit -- not when banks are insolvent.
