A key US lawmaker said on Tuesday that Federal Reserve Chairman Fed Bernanke pledged to use all available tools if needed to calm turbulent financial markets, but he expressed skepticism that the US Treasury appreciated the urgency of the US housing finance crisis.
Senate Banking Committee Chairman Christopher Dodd, however, said he did not urge Bernanke to cut interest rates saying he did not want to put political pressure on the US 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, which also included Treasury Secretary Henry Paulson.
Responding to questions later in a CNBC television interview, Dodd said he did not ask Bernanke to cut the benchmark federal funds rate. "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.
With roiling markets on edge for any clues to the Fed's next policy move, there was heightened investor interest in Dodd's meeting with Bernanke and Paulson. The meeting marked the first publicly announced trip for both Paulson and Bernanke to Capitol Hill since the US credit crisis deepened in mid-July, rocking world financial markets.
Stocks jumped briefly after Dodd's comments, but later fell back, with the Dow Jones off 10 points and other indices just above breakeven. US Treasury debt prices climbed again on Tuesday, with short-dated bonds racking up a ninth straight session of large gains as investors sought refuge from the financial turmoil, while the dollar fell on a weak rate outlook. 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. It also signalled it may be ready to start cutting the broader federal funds rate target by saying the credit crisis now threatened economic growth.
"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 stabilise 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," Dodd said. "Secretary Paulson has expressed his views on the subject matter and has indicated they're not likely to move in that direction, but I'm going to continue urging them to do so," he added.
US lawmakers are beginning to cast a critical eye on the role of market participants and policy-makers in light of recent turmoil in markets. Dodd has been a vocal critic of limits on Fannie Mae and Freddie Mac in the mortgage market, and of loose regulation of subprime mortgage lenders.
Dodd said he also was not opposed to legislation to raise the $417,000 size limit for the fixed rate mortgages that Fannie and Freddie can buy, but he preferred to allow the Fed to pursue a tightening of regulation on mortgage lending.