By Steven K. Beckner

(MNI) – Federal Reserve Governor Elizabeth Duke vowed Tuesday that
the Fed will continue to “use its tools” to promote a faster pace of
expansion in the face of what she called a “significant drag” from the
housing sector.

Duke, in testimony prepared for the Senate Banking Committee, said
the failure of housing to respond to the very low interest rates the Fed
has provided shows that other factors are impeding the recovery.

She suggested that non-monetary policies, such as the various
housing policy options discussed in a Fed “white paper” which Fed
Chairman Ben Beranke sent to Congress last month, may be needed.

But she also suggested that such policies are not free and would
involve shifting costs from one group to another.

Although Duke’s term as governor as expired, she has said she will
continue to serve on the Fed Board of Governors until the U.s. Senate
confirms at least one of President Obama’s nominees to fill two
vacancies on the Board.

Testifying a day before Bernanke is scheduled to deliver his
semi-annual Monetary Policy Report to Congress, the former Virginia
banker said the Fed “has a keen interest in the state of
housing … (because) issues related to the housing market and housing
finance are important factors in the Federal Reserve’s various roles in
formulating monetary policy, regulating banks, and protecting consumers
of financial services.”

Duke said “the failure of the housing market to respond to lower
interest rates as vigorously as it has in the past indicates that
factors other than financial conditions may be restraining improvement
in mortgage credit and housing market conditions and thus impeding the
economic recovery.”

And she said the Fed staff “have been actively working to
understand the reasons behind the impairment in housing and mortgage
markets and the tradeoffs involved in designing policies that would
remove obstacles to normal market functioning.”

Bernanke and other Fed policymakers have said the failure of
housing to respond as it typically has to low rates is “clogging” the
“monetary transmission mechanism” and impeding its effectiveness. But
officials differ about the appropriate response to this “clogging.”

St. Louis Federal Reserve Bank President James Bullard said Friday
that he “would disagree with the idea that because it’s clogged up we
have to push even harder” on the monetary levers.

“If you try to push so hard on monetary policy even when the
mechanism isn’t really working, the whole thing blows up on you and you
get a lot of other problems,” Bullard told reporters at a conference
sponsored by the University of Chicago Booth School of Business.

By sharp contrast, at the same conference, San Francisco Federal
Reserve Bank President John Williams, a voting member of the Fed’s
policymaking Federal Open Market Committee, asserted, “if the channels
are clogged we need to do more.”

Duke did not overtly take a position in this debate, but said, “For
its part, the Federal Reserve will continue to use its policy tools to
support the economic recovery and carry out its dual mandate to foster
maximum employment in the context of price stability.”

“In its supervisory capacity, the Federal Reserve will continue to
encourage lenders to find ways to maintain prudent lending standards
while serving creditworthy borrowers,” she added.

Duke also referred to housing policy options included in the Fed
white paper, including increasing credit availability for households
seeking to purchase a home or to refinance an existing mortgage;
exploring the scope for further mortgage modifications, including
encouraging short sales and deeds-in-lieu of foreclosure in cases where
foreclosure cannot be avoided; and expanding the options available for
holders of foreclosed properties to dispose of their inventory
responsibly.”

But she warned, “Any policy proposals, though, will require
wrestling with difficult choices and tradeoffs, as initiatives to
benefit the housing market will likely involve shifting some of the
burden of adjustment from some parties to others.”

This was also subject to debate Friday, with some participants
supporting government efforts to facilitate mortgage refinancing and
others skeptical.

Bullard said “there is a winner and a loser when you try to
rearrange the contract… . Someone’s going to gain, and someone’s going
to lose … . It’s not the best way to push the economy forward.”

** Market News International Washington Bureau: 202-371-2121 **

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