Fed interest rate cut still on the table

WASHINGTON -- A key U.S. lawmaker said Tuesday Federal Reserve Chairman Ben Bernanke pledged to use all tools necessary to calm turbulent financial markets, but he expressed skepticism 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.

"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.

"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 said.

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.

"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.

The meeting among Dodd, Paulson and Bernanke was closely watched for any insights into the Fed's next policy move. Dodd indicated Bernanke expected a bigger reaction by banks to last week's discount-rate cut, but no confirmation of that was available from the Fed.

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.