It is "pretty clear" that the U.S. housing market is cooling off but it looks poised for a soft landing given overall strength in the economy, U.S. Federal Reserve Chairman Ben Bernanke said Thursday.

"In combination with rising interest rates, affordability is becoming much more difficult and therefore as you would expect you are seeing some cooling in those markets," Bernanke said in a question and answer session after speaking to a Chicago Fed conference on banking regulation.

Click here to visit FOXBusiness.com's Real Estate page.

"We're seeing slowing in sales, slowing in starts. There also seem to be signs that prices are not rising as quickly as they have been for the past few years," he said.

"It looks to be a very orderly and moderate kind of cooling at this point," Bernanke said, adding that the U.S. labor market is strong and incomes are rising.

Financial markets view a slowdown in housing demand as a linchpin of Fed policy for the next few months. As the housing market slows, overall U.S. growth should level off as well, setting the stage for the Fed to halt its two-year program of interest rate increases.

Chances for the Fed to raise rates again in June slipped on Thursday to 46 percent from as high as 58 percent on Wednesday.

Bernanke said the central bank does not have the ability to fine tune asset prices or stock prices with monetary policy, but instead is watching the trajectory of the housing slowdown within the context of the overall economy.

The central bank has concerns about the recent proliferation of non-traditional mortgage products such as adjustable-rate and no-money-down loans, Bernanke said. He noted some 30 percent to 40 percent of new mortgages were of the non-traditional type in 2005.

Chicago Fed President Michael Moskow noted in earlier comments that many adjustable rate mortgages will soon need to be re-priced "under less favorable conditions."

BASEL II GROWING PAINS

Bernanke urged bankers to bear with growing pains associated with new global bank capital standards, which he said would improve bank supervision.

The Basel II bank capital accord would more closely link capital requirements with risk and keep regulators abreast of rapid changes in the financial services industry, he said.

"As we proceed toward the implementation of this framework, success will require that bank regulators, the banking industry, the Congress, and other relevant parties engage in an ongoing and frank dialogue, and that policymakers be open-minded, flexible, and ready to make needed adjustments," Bernanke said in prepared remarks.

The evolution of market practices and the emergence of large and complex banks operating worldwide requires significant changes to the way bank supervisors gauge whether banks are holding a sufficient capital cushion, Bernanke said.

"The overall quality of both the supervisors' and each banks' assessment of capital adequacy should improve greatly under Basel II," he said.

U.S. bank regulators in March issued draft rules to guide domestic implementation of Basel II. In publishing the rules, bank oversight agencies sought to assure the industry and the public that banks would be required to maintain prudent capital cushions and set conservative steps for U.S. adoption of the agreement.

The proposal sets out safeguards that require continual regulatory review and a multi-year transition that includes capital floors to keep capital from declining too quickly or too far.

The March draft came after a test-run of the standards yielded a surprising drop in capital at U.S. banks. That pushed Congress to call for a reevaluation and led regulators to delay implementation even though banks elsewhere in the world moved ahead.

Click here to visit FOXBusiness.com's Real Estate page.