SENATE BANKING Committee Chairman Christopher J. Dodd (D-Conn.) insists the ambitious draft financial regulation bill that he unveiled Tuesday is not about Fed-bashing. Yes, it would transfer the Fed's consumer protection functions to a new agency. And true, whereas House Financial Services Committee Chairman Barney Frank (D-Mass.) would put the Fed in charge of "systemically important" financial firms, Mr. Dodd would create a board on which the Fed is merely represented. But the goal, Mr. Dodd says, is to enhance Fed independence by allowing it "to get back to its core enterprise."

He has a point. The key to a central bank's power is credibility, which in turn hinges on the perception and reality that it is focused on setting interest rates and not doing...