Bernanke to tell Congress has eyes on growth risks

"Rising prices are pinching consumers at exactly the same time that employment is slowing and the housing market is struggling," economic consultant Carl Tannenbaum said in a research note.

"If growth rebounds quickly after the current soft patch (not altogether unlikely, given the amount of fiscal and monetary stimulus in the pipeline), the Fed may find itself having to raise rates aggressively later on this year to keep prices under control," Tannenbaum said.

GROWTH FORECAST CUT, INFLATION RAISED

In updated economic forecasts released last week, the U.S. central bank lowered its outlook for 2008 growth by a half point to between 1.3 percent and 2 percent, citing the prolonged housing slump and bottlenecks in credit markets.

However, it also raised projections for both core and overall inflation, a recognition of the tough environment officials face. While the central bank lowers rates to spur growth, it would usually raise them to combat inflation.

Bernanke's commentary this week will be scoured for signs of how the Fed plans to respond to risks to growth, financial instability, and rising price pressures.

"We have seen deterioration on all three fronts, so the key to the testimony will be how Bernanke perceives the Fed's next moves in light of ultimately fighting battles on all three fronts," Global Insight economists told clients.

While Bernanke is expected to show the Fed focused primarily on downside risks to growth, as he did in testimony less than two weeks ago, he is also expected to nod to the inflation concerns some officials have begun to highlight.

Dallas Federal Reserve Bank President Richard Fisher, a voter on the Fed's interest-rate setting committee, said on Friday that while growth could be slower than the central bank expects, officials needed to be vigilant on inflation risks.

"We have to be mindful of that fact that we have to create the conditions for employment growth, at the same time be careful that we don't stir the embers of inflation, and that represents the horns of a dilemma recently," he said.