Federal Reserve Chairman Ben Bernanke goes to Capitol Hill on Wednesday to testify about the sputtering U.S. recovery, but may have to spend much of his time convincing a stubborn Congress to raise the debt ceiling.
Minutes to the central bank's June meeting on Tuesday suggested that, while some members were pondering the possible need for additional easing amid a weak economy, the Fed is not yet ready to take any further action.
Congressional leaders, themselves paralyzed by an acrimonious fight over the nation's debt ceiling, will likely press Bernanke on how much further growth would have to slow in order for the Fed to step in.
The consensus will continue to be for the Fed to keep the policy rate unchanged as the economy navigates through the current headwinds, said Millan Mulraine, economist at TD Securities.
Dismal employment data last week suggested the economic recovery is faltering despite unprecedented monetary stimulus from the Fed, including a controversial $600 billion bond buying program completed at the end of last month.
Boston Federal Reserve President Eric Rosengren said on Wednesday that with government spending unusually weak and job creation lagging, the U.S. central bank has leeway to keep rates low for some time.
Rosengren told a forum in Worcester, Massachusetts, that with fiscal austerity slowing growth in both the United States and Europe, low rates were necessary to encourage more hiring.
Bernanke, who testifies before the House of Representatives' Financial Services Committee on Wednesday and a Senate panel on Thursday, will likely be asked why the policy has not been more effective at bringing down unemployment, which rose again in June to 9.2 percent.
There were signs the risk from inflation might be receding, with the government reporting on Wednesday that U.S. import prices fell in June for the first time in a year on lower petroleum and food costs.
Adding to the sense of urgency in the testimony, Europe's worsening debt crisis should be expected to feature prominently in the debate. Fed officials had said the U.S. faced little exposure from the continent's financial woes, but sounded a bit more worried in the June meeting.
An escalation of the fiscal difficulties in Greece and spreading concerns about other peripheral European countries could cause significant financial strains in the United States, the meeting minutes said.
Euro zone plans for a leaders' summit on a second Greek rescue were thrown into doubt by Germany on Wednesday, raising fears markets may exploit the policy vacuum with a new onslaught on the bloc's high debtors.
As Washington ties itself in a knot over the debt ceiling, Bernanke will almost certainly reiterate his message that the consequences of not lifting the statutory limit and causing the Treasury to default would be disastrous.
He will also urge Congress against steep near-term cuts in spending at a time when the recovery already looks tepid.
Analysts will be combing his remarks for any hints that the Fed's forecasts for economic growth, revised down at the June meeting, might be again headed to the chopping block in coming months.
If growth in the second half of the year proves weaker than the Fed expects and, importantly, if inflation moves back down, officials might then begin considering a third round of so-called quantitative easing, or QE3.
U.S. gross domestic product grew just 1.9 percent in the first three months of the year, and the second quarter does not appear to have been much better. For 2011 as a whole, the Fed sees U.S. GDP expanding 2.7 percent to 2.9 percent, down from forecasts in a range of 3.1 percent to 3.3 percent back in April.
(Additional reporting by Lucia Mutikani and Kristina Cooke in New York; Editing by Andrea Ricci)