WASHINGTON — Once considered the biggest winner under the Obama administration's regulatory revamp plan, the Federal Reserve Board is likely to lose substantial power if reform legislation is enacted, as expected.

Ideas that were considered extreme not long ago, including stripping the central bank of its supervision powers and subjecting its monetary policy decisions to government review, have gained substantial momentum.

"Change is coming," said Vincent Reinhart, the former head of the Fed's division of monetary affairs who is now a resident scholar at the American Enterprise Institute. "They would be better off accepting that and trying to manage the process rather than being defensive."

Speaking to the Economic Club of Washington on Monday, Fed Chairman Ben Bernanke again stressed the importance of the Fed's role as a supervisor and reiterated his opposition to a plan that would expose the central bank's monetary policy decisions to review from the Government Accountability Office. Lawmakers are also intent on taking away the central bank's power to write and enforce consumer protection laws, moving them to a new agency.

With populist anger running deep and Congress preparing for midterm elections, observers said it is becoming more likely that the Fed's scope will be narrowed.

"It's becoming more clear that the Fed is going to lose some political battles and I'm not just talking about consumer protection, which is small potatoes at this point," said Brian Gardner, an analyst at KBW Inc.'s Keefe, Bruyette and Woods Inc. "The Fed is going to have a tougher time arguing against these measures."

The first defeat for the Fed is likely to come this week when the House is expected to approve a reform package that includes a provision championed by Rep. Ron Paul that calls for the GAO audits.

The measure cleared the House Financial Services Committee last month with strong support from Republicans and Democrats. Rep. Barney Frank, the panel's chairman, has said he does not expect the proposal's language to change on the House floor.

The big question is how the Senate will respond. Similar legislation offered by Sen. Bernie Sanders has won just two co-sponsors: Democratic Sens. Russell Feingold of Wisconsin and Blanche Lincoln of Arkansas.

But other lawmakers seemed to signal their support of the bill's goals during last week's confirmation.

"I would encourage you again to consider what type of openness or audit … would be appropriate in order to reassure the American people that we're not looking at another Fannie Mae situation," Sen. Jim DeMint, R-S.C., told Bernanke. "We were told not to worry, not to worry, everything is OK, and now we saw what it did. We can't allow that to happen to the Federal Reserve."

The Fed is vigorously opposing legislation sponsored by Senate Banking Committee Chairman Chris Dodd, which would take the central bank out of bank supervision entirely. "Our involvement in supervision is critical for ensuring that we have the necessary expertise, information and authorities to carry out our essential functions of promoting financial stability and making monetary policy," Bernanke said during his speech.

But lawmakers from both parties appear skeptical. "If we were to go back, Mr. Chairman, and review the minutes and transcripts of all the FOMC meetings between 2003 and 2008, I wonder what fraction of the time would have been devoted to issues involving supervision and regulation of … holding companies," Sen. Richard Shelby, the top GOP member of the panel, asked Bernanke last week. "Was it half the time? Was it a fourth of the time?"

Bernanke initially responded that in a typical meeting "there would be very little discussion of supervision" but quickly clarified.

"Recently we've talked about it quite a bit because of the financial crisis," he said. "But it depends on the situation."

As he left the hearing, Sen. Bob Corker, R-Tenn., seemed reluctant to allow the Fed to keep a hand in supervision, especially overseeing systemically important firms.

"If that ended up being the Fed, I think over time the Fed's independence would be absolutely decimated," he said.

Reinhart, who was the Fed's top adviser on monetary policy from 2001 through 2007, dismissed Bernanke's contention that the central bank draws on supervisory information to guide monetary policy. For one, the Fed can already gain important information about the banking system through its role as the leader of the payments and clearing system. This, he argued, is how the Fed knew about the conditions of most firms in the immediate aftermath of the Sept. 11, 2001, terrorist attacks. "The impression that's left is if you take away supervision from the Fed, then the Fed will lose all understanding of financial institutions and markets," Reinhart said. "The fact is the Fed will remain the primary provider of services to the financial sector through payments and clearing. That's not going to change and remains a mechanism for the Fed to retain expertise."

But others say that while the Fed certainly picks up important details through the payments system, it cannot glean information about a bank's credit or capital position that way. Without bank supervision, observers said the Fed would not be able to continue as a lender of last resort for financial institutions.

"The payment system is critical but it doesn't tell you about the quality of a bank's assets," said Gil Schwartz, a former Fed lawyer who now works in private practice.

The Fed would get that information, Reinhart said, through "rigorous information sharing" with primary regulators. Under the Dodd bill, the prudential bank supervisor would be required to share information with the Fed as it carries out its monetary policy responsibilities. Reinhart also points to other ways the Fed could learn about banks outside the supervisory process, including asking questions through its periodic Senior Loan Officer Survey.

"Those surveys are conducted outside of [the] supervision [division] because the Fed wants depository institutions to answer as truthfully as possible," he said. "That itself is constructive. … The very fact that it's conducted outside of supervision tells you getting information about banking institutions isn't always done through the supervisory process."

Although the House version of regulatory reform would allow the central bank to keep its direct authority over banks, Frank has made it clear that he is open to compromise on the issue.

Jaret Seiberg, an analyst with Washington Research Group, a division of Concept Capital, said it is telling that the anti-Fed measures have held together so long.

"Typically you would expect something like this to moderate," he said. "So far we're not seeing that. The longer these provisions remain intact, the greater the likelihood is they're going to get enacted."

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