Fed may keep open lifeline to financial firms

By Burton Frierson

NEW YORK (Reuters) - Federal Reserve Chairman Ben Bernanke said on Tuesday the U.S. central bank might keep open a lifeline to financial firms, while the latest data showed distress in the housing and retail sectors continues.

Bernanke promised to consider retaining an emergency lending facility for Wall Street firms past year-end, showing the Fed is determined to stop the housing-inspired credit crisis from wreaking further havoc on the economy.

Investors have lived in constant fear of yet another eruption of credit turmoil, which started last year when it became clear that the bursting of the U.S. housing bubble was causing severe losses across financial markets.

"The presumption was that (Fed officials) were going to wind down the lending programs if and only if credit conditions improve. Obviously that has not been the case," said William O'Donnell, director of interest rate strategy at UBS Securities LLC in Stamford, Connecticut.

"Money has become dear despite their efforts. The problems seem to be elevated and are actually creeping higher."

U.S. Treasury Secretary Henry Paulson said home foreclosures may hit 2.5 million this year, many of them the borrowers' own fault for taking out loans they could not afford.

JPMorgan Chase & Co Chief Executive Jamie Dimon said simply because some problems in the credit markets have been resolved does not mean market conditions will not get worse.

HOUSING, RETAIL, HURTING

Pending sales of previously owned homes plummeted 4.7 percent in May, and sales at chain stores, though improved last week, were weaker in June.

Stocks rose on Wall Street, cheered by a drop in oil prices rather than the economic data, and the dollar gained. Longer-dated U.S. government bonds, which perform better during times of economic weakness, rose.

Economists polled ahead of the home sales report had expected a 2.8 percent decrease in the National Association of Realtors index.

Compared with a year ago, pending sales, which are based on contracts signed in May, were down 14 percent.

"The U.S. housing market is still not on the verge of a recovery," said David Watt, currency strategist at RBC Capital Markets, in Toronto.

The decline in home sales was far more than expected and was just the latest reminder that the economy's current troubles originated in the housing market.

A private report on sales at chain stores showed retail sales were struggling as the economy sags under the weight of the housing slump.