The U.S. economy faces the prospect of continued job losses in coming months but there is hope the situation will stabilize in 2009, U.S. Federal Reserve Chairman Ben Bernanke said Tuesday.

Bernanke said 2008 was a "very bad year" for the labor market, with accelerating job cuts in recent months.

"We're currently in a very bad stage of the contraction as far as employment is concerned, and I would expect to see continued weakness in the first quarter," Bernanke said in a question and answer session at the London School of Economics.

However, the Fed chief offered a glimmer of hope on the economy later in the year.

"As we look forward, there's a lot of uncertainty, but I'm hopeful that later in 2009, depending on factors particularly including the financial and credit markets, we should begin to see some stabilization in the economy...and a stop to the bleeding in a sense."

However, Bernanke said after all recessions, it "takes a while for the labor markets to recover."

The U.S. economy shed 524,000 in December's non-farm jobs report, with the unemployment rate lifting to a 16-year high of 7.2%. In total, the U.S. economy lost 2.6 million non-farm jobs in 2008, the worst year since 1946.

On other issues, Bernanke said the U.S. and other authorities have to think very carefully about the future shape of regulation, striking a balance between more effective rules and market innovation.

"There's been a long-standing tendency to try to find" the right balance - reducing the costs of booms and busts without reducing the benefits of market forces.

"It's a very difficult balance," Bernanke said in a question and answer session following a speech to the London School of Economics.

Bernanke said it's not necessarily the case that authorities need to adopt "a lot more regulation" in future.

"We need to think through what went wrong" and "think very hard about how to fix it," he said.

Bernanke said that for now, the Fed's primary focus is on fighting the economic and financial crisis.

While many of the twists and turns of the crisis were unexpected, one thing that the Fed was not surprised by was the problems with government-sponsored enterprises Fannie Mae (FNM) and Freddie Mac (FRE), which the Fed had been warning about for many years, Bernanke said.

The Fed's key concerns were the conflict of interest between private shareholders and public responsibilities, and the fact that the implicit guarantee by the U.S. government meant they could raise money without market discipline and without oversight for investors, he said.

"I don't think that Fannie and Freddie's mortgages were worse than average; I think they were probably better than average," Bernanke said.

"I think the main problem was inadequate capital and inadequate market discipline for many, many years and it's going to be a very challenging issue for the new administration (in terms of) what should we do next with these organizations."

The U.S. Treasury seized Fannie and Freddie on Sept. 6 and placed them under the conservatorship of their regulator, amid fears the firms couldn't survive a wave of defaults on the mortgage loans they own or guarantee.

-By Natasha Brereton and Laurence Norman, Dow Jones Newswires; 44-207-842-9254; natasha.brereton@dowjones.com

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