Tuesday, August 21, 2007

Bernanke Armed and Ready for Battle

-- Senate Banking Committee Chairman Christopher Dodd said U.S. Federal Reserve Chairman Ben S. Bernanke agreed to use ``all of the tools at his disposal'' to restore stability in financial markets roiled by the subprime mortgage crisis.

Dodd, a Connecticut Democrat who's seeking his party's presidential nomination, said banks should take advantage of lower borrowing costs after the Fed's surprise decision last week to cut the interest rate it charges them. The senator addressed reporters after meeting with Bernanke and Treasury Secretary Henry Paulson in Washington today.

The central bank on Aug. 17 cut the so-called discount rate half a percentage point to 5.75 percent to direct more cash to companies starved for short-term financing while avoiding an emergency reduction in its broader lending-rate target. Fed watchers say it may take days before policy makers know whether the action is having the desired calming effect on markets.

Dodd said he didn't specifically ask Bernanke to cut the benchmark federal-funds rate, and Bernanke didn't pledge to do so. Interest-rate futures show that traders are betting the credit crunch will force Bernanke to ease monetary policy for the first time since 2003.

Markets React

``The comment from Dodd and the decision from the Fed are all going in the right direction to bringing some calm back to the financing market,'' said Nicolas Beckmann, co-head of U.S. interest rates trading at BNP Paribas Securities Corp. in New York, one of the 21 primary U.S. government securities dealers that trade with the central bank.

The three-month Treasury bill yield rose 0.23 percentage point to 3.43 percent, climbing for the first day since Aug. 13. It fell 0.66 percentage point yesterday, the most since the stock market crash of October 1987 as money-market funds dumped asset- backed commercial paper for the shortest-maturity government debt.

While he's satisfied with Bernanke's response, ``I'm still concerned the Treasury does not appreciate the importance of this issue,'' Dodd said.

Dodd reiterated his criticism of the Bush administration for not allowing Fannie Mae and Freddie Mac, the largest sources of money for U.S. home loans, to invest in mortgages larger than $417,000.

``This would have a positive effect on dampening down interest-rate hikes,'' Dodd said. Paulson told the senator ``they're not likely to move in that direction,'' Dodd said.

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