Fed chief sees housing weak into 2008

The housing slump will be a “significant drag” on U.S. growth into next year, though evidence of a broader effect on spending is limited, Federal Reserve Chairman Ben S. Bernanke said Monday.

Although credit markets have improved, a full recovery will take time “and we may well see some setbacks,” Bernanke said in a speech to the Economic Club of New York.

Bernanke’s speech, his first on the economy since August, came as investors pared expectations for an interest rate cut this month. Retail sales increased in September and jobs and wages picked up, suggesting consumers were weathering the worst housing slump since 1991 and reduced access to credit.

The Fed chief pointed out risks to both growth and price stability, declining to indicate whether he favored a further reduction in borrowing costs.

“He was not giving away anything about what the Fed was going to do at the next meeting,” said Robert Hormats, vice chairman of Goldman Sachs International, who attended the dinner.

Bernanke spoke after U.S. markets closed. The dollar and Treasury securities were little changed in Asian trading after his remarks.

The Fed lowered its benchmark rate by half a point Sept. 18, the first cut in four years, to protect the U.S. from sinking into a recession in the wake of fallout from the housing-market collapse.

“The ultimate implications of financial developments for the cost and availability of credit, and thus for the broader economy, remain uncertain,” Bernanke said. “It remains too early to assess the extent to which household and business spending will be affected” by the housing recession.

Answering questions after his speech, Bernanke said that central banks couldn’t be “indifferent” to exchange rates, but that data showed the effect of a falling dollar on prices was “relatively small.”

In response to a question by Henry Kaufman, a former Salomon Brothers Inc. economist who runs a New York firm bearing his name, Bernanke said investment firms “need to be as transparent as possible” about how they value their assets.

Kaufman asked Bernanke what market and economic information he would need for more effective policy making.

“I would like to know what those damn things are worth,” Bernanke joked, referring to the products that investors have shunned in the credit rout. “This episode has revealed a weakness in structured credit products,” namely the difficulty in coming up with valuations in periods of stress.