Bernanke to tell Congress has eyes on growth risks

Federal Reserve Chairman Ben Bernanke will deploy his most reassuring bedside manner in congressional testimony on Wednesday and Thursday to explain how the U.S. central bank, which has already cut interest rates 2-1/4 percentage points since mid-September, can trim them further to prevent recession without letting inflation get out of hand.

"Near-term, the economy remains extremely vulnerable to further contraction because business sentiment has deteriorated further and the aggressive Fed easing to date has been partially offset by tighter financial conditions," Deutsche Bank economists wrote in a note to clients. "This means the Fed is going to have to cut rates further, which is the message Mr. Bernanke will deliver."

Financial markets place a 92 percent chance of a half-point cut in benchmark rates at the Fed's next meeting on March 18, as implied by short-term interest-rate futures. Bernanke's testimony on the central bank's semiannual report on monetary policy and the economy will be closely scrutinized for clues on whether those bets are on the mark.

INFLATION UNEASE

Worried that financial turmoil would undercut an already weak economy, the Fed chopped rates by three-quarters of a point in an emergency move on January 22, just eight days before a regularly scheduled meeting.

It lowered them by another half point when its January 29-30 meeting wrapped up -- a one-two punch that marked one of the most aggressive easings of monetary policy in the central bank's modern history.

At the same time, policy-makers were taking note of a rise in prices that has taken inflation above the 'comfort zone' of a number of Fed officials. Most, however, believed a period of sluggish growth would draw some inflationary pressure out of the system, minutes of the central bank's last meeting said.

Underscoring the Fed's dilemma, the Consumer Price Index, released on Wednesday, showed a worrisome 4.3 percent rise in prices in the 12 months through January.

While surging energy and foods costs accounted for much of the gain, core prices, which strip out energy and food, were up 2.5 percent, the most since last March.