WASHINGTON - The Federal Reserve is "extremely" focused on restoring the credit markets to a healthy state, as the continued reluctance of banks to make more credit available impedes the recovery in the housing market and the wider economy.

"It's certainly the case that tight credit remains a problem," Bernanke said during a question and answer session following remarks prepared for the National Association of Homebuilders in Orlando.

"Conditions are still too tight for the health of the financial system of both the financial system ... and for our economy," he said.

"We are extremely focused on this," Bernanke said, "through our regulation, through our monetary policy, through our interaction with the banks or our interaction with homebuilders, small business and the like."

"We are working to try to improve conditions," added the Fed chairman. "We are intensely focused on trying to get credit conditions back to a healthy condition."

He noted while credit standards were too lax leading up to the housing market meltdown, and some tightening was no doubt necessary once the crisis hit, "the pendulum has probably swung too far in the other direction this time."

Banks remain "quite reluctant" to make a lot of loans -- either to mortgage borrowers or homebuilders -- Bernanke said, as they are concerned about conditions in both the housing market and the broader economy.

"As regulators we have been very clear to the banks ... that we want them to take a balanced approach. We want them to make prudent loans, but we don't want them to turn away creditworthy borrowers," he said.

Bernanke repeated the main thrust of his prepared remarks, that although the Fed has been able to push mortgage rates down, which -- combined with low house prices -- has made housing affordability very high, those benefits are not as effective as hoped.

"We are not seeing as much activity as we would like to see," he said, because the problems in the housing market "are constraining some of the effects that monetary policy should be having on the economy."

Asked to comment yet again on the Fed's Housing White Paper, for which it received much criticism from lawmakers on Capitol Hill, Bernanke reiterated that the report was an attempt to flag and identify some of the key issues in the market.

"Our goal was not to come down with a set of specific recommendations," he said.

"And implicitly, one of our main objectives of course ... is simply to make people aware of how central to the recovery housing is," Bernanke added. "We are going to continue to work on these issues, and try to find solutions."

He cautioned that there is no single solution to the housing market's woes, as there so many interlocking issues. 

Casting an eye over the broader economy, Bernanke there have been "pieces" of good news recently, particularly in the labor market, which he said is always welcome.

Going forward, he said the Fed expects the recovery to continue at a moderate pace although there are some risks.

The most important of these risks is the ongoing sovereign debt crisis in Europe, Bernanke said.

"That has the potential to create uncertainty and volatility in our financial markets," he said. "We are paying close attention to those."

Bernanke also repeated his warning over how critical it is that the United States gets its fiscal policy onto a more sustainable path.

Aside from these expected risks, Bernanke said given the unanticipated shocks to the economy seen last year -- such as the natural disasters in Japan and the Arab Spring -- the Fed is also keeping a close eye on "unknown unknowns."

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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