* Reform bill restricts Fed mostly to Treasuries, repos

* Measure would end Fed's direct influence in housing sector

* Consumer Financial Protection Bureau funding targeted (Adds background, details on competing Democratic proposal)

By David Lawder

WASHINGTON, March 2 (Reuters) - 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 mortgage-backed securities.

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 institutions.

The bill is unlikely to clear Congress, where Democrats who control the Senate will be reluctant to drop the Fed's mandate to focus on full employment.

Still, the measure represents an important marker that could set the tone for legislation on the Fed if Republican political power grows in November elections.

Democrats have also sought changes to the Fed system, which came under harsh criticism during the financial crisis over Wall Street bailouts and lax supervision of lending practices. The leading Democrat on the House Financial Services Committee, Rep. Barney Frank, is considering legislation that would take the votes away from five regional Fed bank presidents in policy decisions and give them to five officials appointed by the president.

Democrats have long raised concern about the accountability of regional Fed bank presidents, who are appointed by banks and business people in their regions and not subject to Sentate confirmation.

Frank's measure is also unlikely to gain traction because of a divided Congress and because the Massachusetts lawmaker is not seeking reelection in the fall.

TARGETING CONSUMER PROTECTION

Under the bond-purchase provision of Brady's bill, 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 and refinancings.

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 fight inflation, under the Brady bill would be stripped of the jobs mandate.

The Brady bill, if it became law, would refocus the Fed on controlling inflation and maintaining the purchasing power of the dollar.

Last month, the Fed announced an explicit target of 2 percent inflation. While an inflation target has been a long-standing goal of Bernanke's, the move was timed to underscore the bank's commitment to keeping inflation at bay even as it reaches for additional ways to loosen financial conditions.

In setting a target for inflation, the Fed acknowledged that it could not set a similar goal for employment because the maximum level of employment is determined by a range of factors affecting labor markets that can change over time.

According to a summary of Brady's bill 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 Bureau 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 Great Depression in the 1930s, is seldom used today. 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.

(Additional reporting by Mark Feselenthal; Editing by Leslie Adler and Jan Paschal)