Sept. 7 (Bloomberg) -- Representative Barney Frank, the Massachusetts Democrat who heads a congressional committee that oversees the Federal Reserve, called on policy makers to cut interest rates after employers reduced payrolls in August.

``A strong response is required -- specifically, a meaningful interest-rate cut,'' Frank, chairman of the House Financial Services Committee, said in an e-mailed statement. ``The deeply troubling August employment report should end any debate about the action that the Federal Reserve Board must take when the Open Market Committee meets on Sept. 18.''

The pressure to lower rates is the latest effort by Frank to step up congressional scrutiny of the central bank, an independent agency. He and other Democratic lawmakers have faulted the Fed for failing to stem predatory lending practices during the mortgage boom that's now unraveling.

``It's been a long time since we've seen Congress impose its will on the Fed,'' said David M. Jones, a former Fed economist who has written books on the central bank. ``It's inappropriate for Congress to give specific orders to the Fed with regard to monetary policy moves.''

Frank's call was echoed from Capitol Hill to Wall Street.

``To ease or not to ease its key interest rate is no longer the question for the Fed,'' Democratic Representative Carolyn Maloney of New York, chairman of the House subcommittee on financial institutions and consumer credit, said in a statement. ``The question now is how soon and by how much?''

`Spur the Economy'

``We need the interest rates to be lower to spur the economy,'' Richard Trumka, the treasurer of the AFL-CIO, the biggest U.S. labor group, said in an interview today.

Barclays Capital Inc. economists today abandoned their prediction that the central bank would hold rates until June. The group now sees cuts at the next three meetings.

``There is not much doubt'' now, said Julia Coronado, a senior economist in New York.

Senator Christopher Dodd, the Connecticut Democrat who chairs the Senate Banking Committee, met with Fed Chairman Ben S. Bernanke Aug. 21 to discuss the credit-market turmoil. While Dodd said he didn't specifically ask Bernanke to cut the main rate, he told reporters ``there's a need for some action'' to minimize the impact of reduced availability of capital.

Paulson's Confidence

Bush administration officials have refrained from commenting on how the Fed should respond. Treasury Secretary Henry Paulson said in an interview today that he had ``great confidence'' in the central bank.

U.S. employers cut 4,000 jobs from payrolls last month, sending stocks lower and spurring investors to add to bets the Fed will lower rates. None of the 88 economists surveyed by Bloomberg News before the Labor Department report had forecast a decline.

The surprise hammered stocks, sending the Dow Jones Industrial Average down 253.14 points at 3:52 p.m. in New York, to 13,110.21.

One indication of continued stress in financial markets is the benchmark three-month rate that banks charge each other for dollars. The three-month London interbank offered rate, or Libor, for dollars was unchanged at 5.72 percent, the highest since January 2001, the British Bankers Association said today.

`Disquieting'

``This is particularly disquieting as a sizeable fraction of adjustable-rate mortgages, particularly subprime mortgages, are pegged to the Libor rate,'' Neal Soss, global head of economics at Credit Suisse in New York, wrote in a note to clients. Soss's team predicts the Fed will lower its benchmark rate by 0.75 percentage point by year-end.

Fed officials at their Aug. 7 meeting kept the benchmark rate at 5.25 percent for a ninth meeting and reiterated that inflation remained the ``predominant'' concern. They were forced to abandon that bias on Aug. 17, stating after a conference call the previous day that risks to economic growth had increased ``appreciably.''

``The notion that inflation risks outweigh the risks to output and employment growth is not supported by the evidence,'' Frank said in his statement, released today in Washington.

Frank sparred with Bernanke at a February committee hearing over the Fed chief's bias toward raising rates and his focus on inflation.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net.

Last Updated: September 7, 2007 15:58 EDT