Wall Street regulators' attempt to toughen bank rules has resulted in a surprising alliance of opponents, prime-time television commercials and an unprecedented legal threat that's shocked even the most seasoned policymakers.

Why it matters: Top regulators, including at the Fed, proposed new rules that seek to bring America more in step with international peers and safeguard the financial system after last year's banking turmoil. But it now looks like the final rule won't be as harsh as what was initially proposed.

Driving the news: Industry comments on the proposal were due this week. Among them is a several-hundred-page memo from top lobbying groups that argue the rules go too far and will harm the economy.

• The group hired a powerful lawyer and threatened an unprecedented lawsuit against their own regulator over the rule.
• They have surprising allies, some of whom typically root for tougher bank rules, including housing advocates, civil rights groups and some Democrats, who cite the impact the rules might have on mortgage lending.

What they're saying: "We've never seen anything like this kind of opposition," Jeremy Kress, assistant business professor at the University of Michigan and a former Fed lawyer, tells Axios. "I think it's caught the regulators off guard."

• Kress, among banking scholars who submitted a comment in favor of the rule, said the pushback is far beyond that seen during the last major banking overhaul after the 2008 financial crisis.
• "During the Dodd-Frank implementation, the banks pushed back, but we never saw anything like a commercial aired during Sunday Night Football," Kress said.

Catch up quick: The proposal would force banks to hold more capital (among other requirements), which regulators say would make the financial system safer by giving banks additional buffer to withstand economic shocks.

• Opponents claim the proposal is so tough that banks would need to pull back on other activities, including lending, to adjust.

Where it stands: The proposal has divided the Federal Reserve with a rare public spill-out of disagreement that has opponents calling for a redo.

• "[T]he blowback we've seen from the banking industry and [Capitol] Hill has shown this is not a good proposed rule as it stands now," Fed governor Christopher Waller, who opposed the initial proposal, said this week.
• "[I]t's got to have a major overhaul," Waller said, adding that it might be best for regulators to just start over.

Fed governor Michelle Bowman, who also voted against the initial proposal, said this week that the central bank would soon release data on how the rule would impact banks.

• That data should "serve as a guide to assist in shaping the next iteration of this proposal, whether that be in the form of a re-proposal or significantly revised final rule," Bowman said.

What to watch: Michael Barr, the Fed's vice chair for supervision and the face of the proposal, hinted last week that changes might be ahead.

• "We want to make sure that the rule supports a vibrant economy that supports low- and moderate-income communities," Barr said, adding that he was taking public comments "very seriously."

Go deeper

The Fed's other job besides regulating financial institutions is, of course, setting monetary policy. There, it's facing another huge question: when to lower interest rates.

What they're saying: "On balance, it appears that restrictive monetary policy is indeed working to help lower the rate of inflation," Atlanta Fed president Raphael Bostic said yesterday.

• "The rub is that if we keep policy too restrictive for too long, we risk doing unnecessary damage to the labor market and the macroeconomy."

The intrigue: Bostic, borrowing an analogy from Fed colleague Austan Goolsbee, said this next phase of policymaking is "a bit like cooking a holiday turkey."

• "[E]veryone in this room knows that one faces the risk of overcooking the turkey by leaving it in at full baking heat for too long, because the turkey continues to cook even after it is removed from the oven," Bostic said.

Bostic said it's like keeping interest rates too high for too long — even if the Fed is no longer raising them.

• "[T]he effects of restrictive monetary policy could continue to impinge on economic activity and labor markets even after the [Fed] stops actively tightening."
• But, he adds: "[P]remature rate cuts could unleash a surge in demand that could initiate upward pressure on prices."

The big picture: Bostic warns that continued progress on inflation, which has given Fed officials hope that they can lower interest rates this year, is far from assured.