Fed's Bernanke to play the hawk on Capitol Hill
(Reuters)
Updated: 2006-02-15 13:50

Federal Reserve Chairman Ben Bernanke will seek to establish his anti-inflation credentials when he delivers the central bank's semi-annual report to Congress on Wednesday after just two weeks on the job.

The Fed chairman's testimony, always closely watched, will be parsed more intently than usual as financial markets try to size up the man who took over from Alan Greenspan on February 1 and search for clues on the path of interest rates.

Ben Bernanke faces the U.S. Senate Banking Committee on Capitol Hill in Washington in this November 15, 2005 file photo. Bernanke will seek to establish his anti-inflation credentials when he delivers the central bank's semi-annual report to Congress on February 15, 2006. [Reuters]

Bernanke, a top economic adviser to President George W. Bush until he took the Fed's reins, appears before the House of Representatives' Financial Services Committee at 10 a.m. He goes before the Senate Banking Committee on Thursday.

After he delivers the Fed's twice-yearly monetary policy report, Bernanke will be asked questions by lawmakers eager to draw him into wider policy debates, something he has said he will be reluctant to participate in.

The former chairman of the Princeton University economics department is already a known quantity on Wall Street, having served on the Fed's board for nearly three years before moving to the White House last June.

Bernanke's first Fed stint came as the central bank was trying to energize a sluggish economy and thwart the risk of deflation, a potentially crippling economy-wide fall in prices.

He was then an outspoken advocate of tough steps to lift the inflation rate, a fact that has led some in financial markets to question whether he can be tough on prices.

But now the economy appears to be firing on all cylinders and a more traditional enemy -- inflation -- is back on Wall Street's radar screen.

"His challenge for the early part of the chairmanship is to establish his anti-inflation credibility as well as he established his anti-deflation credibility," analysts at consulting group ISI Group wrote earlier this week.

TOUGH TONE, FEW DETAILS

Although Bernanke is expected to talk tough on inflation, economists said he will offer few details on how aggressively the Fed may need to act to keep it at bay.

After raising benchmark overnight interest rates by a quarter-percentage point to 4.5 percent on January 31, the central bank said "some further policy firming may be needed." The new Fed chief is expected to stick close to that guidance.

Included in the report he is to deliver will be forecasts for economic growth, inflation and unemployment from members of the central bank's policy-making Federal Open Market Committee, which could offer some clues on where they see rates headed.

The central bank's favorite measure of core inflation rose 1.9 percent last year, at the top end of its perceived comfort zone. Analysts caution it could move higher still.

"I think the most important thing is for him to keep inflation expectations anchored," said Doug Lee, president of Economics From Washington. "It's hard for them to stop raising rates if inflation is edging up."

A month ago, financial markets thought there was only about a 50-50 chance of a rate hike at the Fed's upcoming meeting on March 27-28. But after a slew of upbeat data, including a surprise drop in the U.S. jobless rate to an historically low 4.7 percent, a March rate hike is seen as a done deal.

Financial markets now see a near-certainty of another quarter point move by mid-year as well and traders will examine Bernanke's every word as they consider changing their bets.