INSTANT VIEW: Bernanke warns of systemic risk

NEW YORK (Reuters) - Restoring financial market stability is a top priority for the Federal Reserve as a weakening housing market, tighter credit and rising oil prices threaten the economy, Fed Chairman Ben Bernanke said on Tuesday.

Financial markets and institutions remain under "considerable stress," Bernanke said.

His comments come just two days after the Treasury Department, in close coordination with the Federal Reserve, announced measures to aid mortgage finance companies Fannie Mae and Freddie Mac, which have been under pressure as the housing market deteriorated.

In its semi-annual monetary policy report to Congress, the Fed raised its projection for growth in 2008 to a range of 1.0 percent to 1.6 percent from a 0.3 percent to 1.2 percent range it forecast in April on expectations for stronger consumer spending.

In the face of costlier energy, the U.S. central bank also raised its inflation forecast to a range of 3.8 percent to 4.2 percent, up substantially from its previous 3.1 percent to 3.4 percent projection.

COMMENTS:

SUBODH KUMAR, CHIEF INVESTMENT STRATEGIST, SUBODH KUMAR &

ASSOCIATES, TORONTO, CANADA:

"I think Bernanke has been realistic, but I think the issue is that the market expectations, including earnings and perhaps credit, have been somewhat unrealistic, so all the recalibration of the market has happened in a very short period.

I think that the market are now entering a territory which should be quite interesting for value-oriented investors. We are now below the 1,215 level for the S&P, you are entering into an area where value-oriented will be looking closely."

ROBERT MACINTOSH, CHIEF ECONOMIST, EATON VANCE CORP,

BOSTON:

"Bernanke is changing his tune a little bit, he has become more worried about economy than he was before. I wish I could say this is the end of the angst, but I would have said that already about 10 times along the way here. There is probably more room for upside in Treasures, if the economy is as weak as it is, or as weak as it may become -- there is (more room for price upside). No one knows where it is going to end for stocks, talk about a negative tone, no matter what anybody says or does it seems to get worse."

GEORGE ADELL, FIXED INCOME STRATEGIST, COMMERCE CAPITAL

MARKETS, JUPITER, FLORIDA:

"Nothing has really changed for the Fed. The downtick in the economy continues and inflation has intensified on the upside. It has tied the Fed's hands from a policy perspective. They can't do anything because the numbers have been coming in mixed."

"The market doesn't like that neutrality. It only adds to daily market volatility. We probably have to live with that though the summer. The day's market moves have been predicated on the stock market, It has generated a flight-to-safety to bonds like what we saw in March and April."

WARREN SIMPSON, MANAGING DIRECTOR AT STEPHENS CAPITAL

MANAGEMENT IN LITTLE ROCK, ARKANSAS:

"He's probably saying the truth but he has to be careful with what he says. I think that between the banks and Freddie Mac and everything else you're going to see some more bank failures soon. The fact is, we in a tough spot. We're going through beginning of the de-leveraging process. It's going to be as painful as anything we've ever had to go through in quite a while. I do not think that's an overstatement at all to say that this is a historic time."

KEVIN FLANAGAN, FIXED INCOME STRATEGIST FOR GLOBAL WEALTH

MANAGEMENT WITH MORGAN STANLEY IN PURCHASE, NEW YORK:

"I think the report is little less hawkish than what we saw in the June FOMC policy statement. There seems to be more emphasis on the concerns for the economy rather than on inflation."

"These are all signs the Fed has no room to raise rates anytime over the near term. So far so good for Treasury bonds, which are tapping a flight-to-quality trade, with GSEs weighing on stocks."

"The flight-to-quality trade is definitely back in vogue and the move in bills is definitely reflecting that.

"There are going to be ongoing difficulties in the financial sector's balance sheet."

GARY THAYER, SENIOR ECONOMIST, WACHOVIA SECURITIES, ST.

LOUIS, MISSOURI:

"Bernanke sounded concerned about both the downside risks to the economy and the continuing inflationary pressures but overall the Fed's outlook remains one for slow growth. He said that the Fed expected that it will probably take a year or more to work through the housing problems. He did note that existing home sales have been about unchanged this year which was one of the positive things he had to say about housing, but still there's a large supply of homes for sale and downward pressure on prices. Also on the banking system he talked about how problems in the mortgage market have made lenders reluctant to lend so credit conditions are still very tight. The market looked at the comments as being a little negative and that hurt stocks and helped safe-haven bonds."

JOSEPH TREVISANI, CHIEF MARKET ANALYST AT FX SOLUTIONS,

SADDLE RIVER, NEW JERSEY:

"He is not saying very much that he hasn't said many many times before. The idea that inflation will moderate has been something that he has been on for a year-and-half now. The problem is there is really nothing in the statistics to bear it out. They like to make a difference between core and headline inflation. They pay attention to core inflation, they pay attention to the PCE deflator. The problem is from a consumer point of view, the core inflation is rather irrelevant. One of the problems the Fed's credibility is having right now is that the ECB pays attention to headline inflation. That's the number they track, that's the number they target. As far as that goes, and you are seeing it in the currency market right now, it's not providing any support for the dollar and I don't think it will."

STEVE GOLDMAN, MARKET STRATEGIST, WEEDEN & CO. IN

GREENWICH, CONNECTICUT:

Again the Fed talked of some heightened short term risk with inflation and with economic growth. I do think most people were expecting that, its still alarming to hear and the market did react to this news given Bernanke didn't sugar coat the situation.

"It's incredible -- it's not so much the market so much as the financial system. People's horizons are moving out to 2009 and they are still not seeing any end in sight and with credit losses increasing that's really not good news.

The backstop with Freddie Mac and Fannie Mae doesn't deal with heart of the problem, foreclosures, supply. Had they addressed that issue earlier on there may have been some hope at this point.

DAVID WATT, SENIOR CURRENCY STRATEGIST, RBC CAPITAL

MARKETS,TORONTO:

"It's pretty much what I would have expected. On the growth side, Bernanke's comments are a little bit dovish. I expected very intense discussions on the risks to inflation. It downgrades the chance of a Fed hike in interest rates. It extinguishes any talk of a rate hike which has lingered in the market given the inflation concerns."

DUSTIN REID, SENIOR CURRENCY STRATEGIST, ABN AMRO, CHICAGO

"They have reopened the downside growth risk scenario, which they'd moved away from in the previous statement. The net is now extremely wide for the Fed, with upside inflation pressures and considerable downside growth risks. The Fed's having a difficult time, as are most other central banks, as to what the next move should be. This concern - it's kind of a handcuffs situation for the central bank - is never good for a domestic currency, so this is a sell dollar situation, at least against the G4 (euro, yen, sterling)."

GREG SALVAGGIO, SENIOR VICE PRESIDENT OF CAPITAL MARKETS,

TEMPUS CONSULTING, WASHINGTON:

"The currency market doesn't like what Bernanke said, especially the reference to significant downside risks to the growth outlook and the financial sector still under considerable stress. I don't think the Fed is prepared to hike rates anytime soon. It's still dollar weakness for now."

MARKET REACTION: STOCKS: US benchmark S&P500 index fell further to around 1206, its lowest level in about two and half years; BONDS: US benchmark ten-year Treasury note yield fell to around 3.78 percent; CURRENCY: The U.S. dollar fell testing the record low against the euro around $1.60, and was trading around 104.37 yen.