Federal Reserve Chairman Ben Bernanke faces the first of two days of congressional testimony that will subject the Fed's controversial bond-buying program to tough scrutiny and gauge his confidence in the resilience of the U.S. economy.
Coming just a week after the Fed's meeting minutes sent U.S. stocks reeling by suggesting the central bank could pull back its economic stimulus earlier than had been expected, and a day after another sharp stock market drop, investors are certain to hang on every word.
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Beginning with the U.S. Senate Banking Committee on Tuesday, the scholarly Fed chief will be quizzed by some bitter critics of the aggressive steps he has championed to spur growth. On Wednesday, he will appear before the House Financial Services Committee.
"His opinion remains that there is still not enough growth, that high unemployment is a cyclical issue, that there is not enough inflation," economists at TD Securities in New York said in a note to clients. "He will keep the pedal to the metal deep into 2013."
The Fed chairman's prepared testimony is scheduled to be released at 10 a.m. (1500 GMT) on Tuesday, followed by a lengthy question-and-answer session. By tradition, he will issue the same statement on Wednesday before facing the House panel.
FIRST, DO NO HARM
Lawmakers in both chambers will seek his comment on the likely impact of $85 billion in across-the-board government spending cuts that are set to take effect on March 1.
Bernanke is likely to repeat his line that the indiscriminate axe they take to the budget will hurt the recovery, and argue that it would be better to cut the deficit over time and avoid the risk of a near-term fiscal shock.
Lawmakers will also question him about the Fed's bold bond- buying program, which has tripled the size of the central bank's balance sheet to $3 trillion since 2008.
The Fed, which cut overnight interest rates to near zero more than four years ago, is currently buying $85 billion a month in government and mortgage-backed bonds to keep longer- term borrowing costs low and spur the economy's recovery. The Fed has said it would continue to purchase bonds until it sees a substantial improvement in the outlook for the labor market.
That still appears a long way off. In January, the jobless rate ticked up a tenth of a percentage point to 7.9 percent.
Many Republicans have criticized the Fed's aggressive easing of monetary policy for risking inflation and asset bubbles, and for facilitating excessive government spending by keeping the nation's borrowing costs low.
Some of the same concerns have resonated within the central bank.
Minutes of the Fed's Jan. 29-30 policy meeting, released last week, showed that a number of officials felt the potential risks posed by buying bonds could warrant tapering or ending the program before hiring picks up. However, several others argued there was a danger in halting it prematurely.
Financial markets are keen to find out where Bernanke stands. Expectations that he would offer reassuring words, coupled with fears that Europe's debt crisis could grow worse, led on Monday to the biggest drop in the yield on the benchmark 10-year U.S. Treasury note since November.
"You are probably going to hear a message that does not lean so heavily on the costs" of bond buying," said Michael Feroli, an economist with JPMorgan in New York.