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Fed willing to do more, senator says

But the secretary of the Treasury cautions that the credit crisis will not be resolved quickly.

August 22, 2007|From the Associated Press

Federal Reserve Chairman Ben S. Bernanke signaled a willingness to consider an early cut in the benchmark interest rate to quell market unrest, a key lawmaker said Tuesday after meeting with the Fed chief.

However, the Treasury secretary cautioned that it would take time for the credit crisis to play out, and skittish U.S. stock markets struggled to sustain modest afternoon gains.

Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, said Bernanke was "absolutely" willing to use all available tools to ease a credit squeeze that has limited companies' ability to raise funds.

Finance chiefs from Japan and Germany also tried to reassure investors that they were watching the situation closely.

Capital markets remained tight Tuesday and many investors called on the Fed for a cut in the federal funds rate, the central bank's main monetary tool.

But Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, Va., discouraged hopes for an imminent cut, saying the situation warranted a rate change only if it affected the outlook for inflation or growth.

Nervous investors continued to shift into short-term Treasury debt, a traditional sanctuary from volatile markets, driving their yields lower for a ninth straight session. Yields on T-bills had plunged Monday.

"Portfolios are in hyper-risk-averse mode," said Joseph Di Censo, fixed-income strategist at Lehman Bros.

The Fed has already stepped in with billions of dollars in temporary reserves in recent days, plus Friday's surprise half-point cut in the discount rate on direct loans to banks.

Treasury Secretary Henry Paulson, who attended the meeting with Dodd and Bernanke, warned that financial markets would improve only after a necessary period of adjustment.

"We've had some bad lending practices," he told CNBC television. "There's not going to be a quick solution to some of the issues in the credit markets, but . . . we will work through these issues because we have an economy that's strong."

In Europe, the chief executive of German bank WestLB, Alexander Stuhlmann, said problems in the U.S. sub-prime mortgage market were making it difficult for German banks to get credit lines from their foreign partners.

German Finance Minister Peer Steinbrueck, however, said Europe's economy wasn't badly hurt. "I have no reason to doubt that we can effectively manage the effects of the U.S. mortgage crisis in Europe," he said.

The European Central Bank on Tuesday injected more money into the banking system than expected after banks showed strong demand for funds while credit worries made them unwilling to lend to one another.

The Bank of England added $624 million to Britain's financial system, the first time it tapped its so-called standing facility in more than a month.

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