WASHINGTON -- A key U.S. lawmaker said Tuesday that Federal Reserve Chairman Fed Bernanke pledged to use all tools necessary to calm turbulent financial markets, but he expressed skepticism that the Treasury appreciated the urgency of the housing finance crisis.
Senate Banking Committee Chairman Christopher Dodd, speaking after a meeting with the Fed chief and Treasury Secretary Henry Paulson, said he did not urge Bernanke to cut interest rates, saying he did not want to put political pressure on the central bank.
"I asked the chairman of the Fed whether or not he was willing to use all the tools available to him, and he said he was prepared to do that; 'absolutely' is the language he used, and I applaud that," Dodd told a news conference following the meeting.
Responding to questions later in a CNBC television interview, Dodd said he did not ask Bernanke to cut the benchmark federal funds rate.
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"The last thing you want is someone in politics telling an independent agency what they ought to do on rate cuts. That's dangerous," added Dodd, who is a contender for the Democratic nomination for the presidential election in November 2008.
The Fed last Friday cut its discount rate governing direct loans to banks by a half percentage point, to 5.75 percent, to boost liquidity in the banking system and calm markets.
ECONOMY THREATENED
It also signaled it may be open to cutting the broader federal funds rate target by saying the credit crisis now threatens economic growth.
The meeting among Dodd, Paulson and Bernanke was closely watched for any insights into the Fed's next policy move. Dodd indicated that Bernanke expected a bigger reaction by banks to the discount-rate cut, but no confirmation of that was available from the Fed.
But in Charlotte, North Carolina, Richmond Fed Bank President Jeffrey Lacker said it was too early to judge the impact of Friday's cut in the rate on loans the Fed makes to banks and said inflation risks remain a worry.
"Financial market volatility, in and of itself, does not require a change in the target federal funds rate, in my view," Lacker told a business group. "Interest rate policy needs to be guided by the outlook for real spending and inflation."
Stocks were flat in early afternoon trading while bond prices kept climbing as investors sought refuge from financial turmoil in safer investments.
In a news conference from Canada, where he was attending a summit with political leaders from Mexico and Canada, President Bush said the U.S. economy remained healthy and there was no sign of a potential seizing-up of credit.
"Fundamental question: Is there enough liquidity in our system as people readjust risk? And the answer is, Yes, there is," Bush said.
HOMES AT RISK
Dodd said he urged Bernanke and Paulson to use all available tools to keep markets functioning smoothly, keep credit flowing to the economy and keep financially stressed home owners from losing their houses. If millions of Americans lost their homes, it would seriously undermine the economy, he added.
"I left here with the sense that the Fed gets it and understands it. I'm still concerned that Treasury doesn't not appreciate the importance of this issue," Dodd told the news conference.
Dodd said he had asked Paulson to lift the mortgage portfolio limits on housing finance giants Fannie Mae and Freddie Mac, but Paulson expressed reluctance to do so.
Allowing Fannie and Freddie to expand their mortgage portfolios would help stabilize housing markets, Dodd said, adding that it could be done by regulatory order without legislation.
"This would have, I think, a positive effect of dampening down interest rate hikes within the conforming loans that Fannie and Freddie may deal with here," he said.
Dodd has been a vocal critic of limits on Fannie Mae and Freddie Mac in the mortgage market, as well as loose regulation of subprime mortgage lenders.
Dodd said he also was not opposed to legislation to raise the $417,000 limit for the fixed-rate mortgages that Fannie and Freddie can buy, but said he preferred to allow the Fed to pursue a tightening of regulation on mortgage lending
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