Bernanke vs. the economy

Quick Vote

Do you believe the U.S. economy is in a recession?

• Yes
• No

or View results

Video

More video

Forecasts for economic growth this year show that the American economy will grow about half as much as the other super powers. Play video

NEW YORK (CNNMoney.com) -- It's no rest for the weary, or at least for Federal Reserve Chairman Ben Bernanke.

After testifying before lawmakers earlier this month alongside Treasury Secretary Henry Paulson, the Fed chief returns to Capitol Hill Wednesday and Thursday to appear before the House Financial Services and Senate Banking committees.

While his remarks will center on the state of the central bank's monetary policy, the Fed chairman is widely expected to face questions about the shaky state of the U.S. economy, the health of the credit markets and the rising risk of inflation.

Less than two weeks ago, Bernanke and Paulson faced questions when they testified before a Senate Banking committee.

At the time, the two policymakers warned of slower economic growth in the coming year but said they believed the U.S. economy would avoid tipping into a recession, helped in part by the $170 billion economic stimulus package signed by President Bush on Feb. 13 and the most recent interest rate cuts by the Federal Reserve.

While Bernanke will probably elaborate on those remarks, the consensus among economists is that he won't stray from his current script.

"It would be a surprise if he deviated too much from what he said two weeks ago," said Scott Brown, chief economist at Raymond James.

Policy position

Since then, however, the Fed has arguably taken a more dour stance on the economy. Last week, it cut its growth forecast, warning that it expected the unemployment rate to climb above 5 percent.

And the latest numbers seem to back that up.

A survey on residential real estate released Tuesday revealed that the decline in home prices picked up at the end of 2007. And consumer confidence fell to its lowest level in five years, the New York-based Conference Board reported, on fears about the job market and slowing business activity.

To help keep the economy from tipping into a recession, the Fed has steadily cut the federal funds rate, which affects a variety of consumer loans, since September. It slashed interest rates twice by 1.25 percentage points in just under a week last month.

Right now, the growing consensus is that the Fed will cut interest rates by another half a percentage point when policymakers meet again on March 18.

Bernanke may hint at the Fed's future actions, given the growing threat of inflation, said Nariman Behravesh, chief economist at the Boston-based Global Insights.

"For our own forecast, the nuance in terms of inflation will help us make us the call," said Behravesh.

Even though the minutes from the most recent Fed meeting revealed that policymakers did not believe inflation was a threat, fears about rising prices have started to move back into focus recently.

The Consumer Price Index, the government's favored inflation reading, revealed a bigger-than-expected jump in January, even when accounting for volatile food and energy prices. At the wholesale level, prices surged during that same period, the Labor Department said Wednesday, climbing at its fastest rate in 16 years.

But with plenty of economic reports due out before the next Fed meeting, Bernanke may suggest that the central bank is adopting a wait-and-see approach before providing any guidance on future monetary policy moves, said Bob Stein, senior economists at First Trust Advisors. Next week, for example, will bring the February employment report, while the next reading on consumer inflation is due out March 14.

"I think he will let the data speak for itself over the next couple weeks," said Stein.

Market focus

One item that remains a significant concern for the Fed and is likely to be a focus during Bernanke's testimony is the fragility of the credit markets, which continue to face major liquidity problems.

The commercial paper market - a key source of short-term funding - continues to remain under pressure, based on the latest data from the Federal Reserve.

And of course there is the related bond insurer crisis, which has occupied much of Wall Street's attention lately.

Investors have worried that a downgrade of the two largest players in the industry, Ambac (ABK) and MBIA (MBI), would result in further losses at the nation's largest financial firms, although such a move appeared less imminent Monday after Standard & Poor's refrained from cutting the Triple-A rating of either firm.

That fallout of the bond insurers' troubles already appears to be spreading and is certain to be a focus for lawmakers, said Diane Swonk, chief economist at Chicago's Mesirow Financial.

Cities and towns are already facing higher borrowing costs as a result of the crisis, making it more difficult to pay for public projects like repairing bridges or building schools.

And some experts have argued that if the situation worsens it could lead to tighter lending standards and create an additional drag on the already troubled U.S. economy.

"This credit market instability it is their number one priority - they need to bring stability to financial markets to head off additional weakness in the economy," said Swonk.