Fed chairman Ben S. Bernanke said this morning (May 17) that he does not expect the turmoil in the subprime mortgage market to spread to the overall economy or to the nation's financial system.

In a speech to bankers assembled for a Federal Reserve conference in Chicago, Bernanke said that although the problems in the subprime market will likely linger and perhaps worsen, they will have a "limited" effect on the housing sector and on the economy.

"Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system," said Bernanke, according to a text of his remarks posted on the Federal Reserve web site. "The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable."

He continued, "Importantly, we see no serious broader spillover to banks or thrift institutions from the problems in the subprime market; the troubled lenders, for the most part, have not been institutions with federally insured deposits."

Bernanke said he expects further erosion in the housing market as a result of tightened credit standards. "The rise in subprime mortgage lending likely boosted home sales somewhat, and curbs on this lending are expected to be a source of some restraint on home purchases and residential investment in coming quarters," he said. "Moreover, we are likely to see further increases in delinquencies and foreclosures this year and next as many adjustable-rate loans face interest-rate resets."

Going forward, Bernanke said the Fed is looking at what changes it may have to make in its regulatory policy and how it works with other agencies in keeping watch over the practices of mortgage lenders, particularly in the area of disclosure. "Markets are adjusting to the problems in the subprime market, but the regulatory agencies must consider what additional steps might be needed," he said. "The Federal Reserve is currently undertaking a thorough review of all its options under the law."