Ben Bernanke will not get an easy pass from U.S. lawmakers on Friday as the Federal Reserve chairman delivers his first congressional testimony since the central bank launched a controversial bond-buying policy.
Facing a newly-empowered Republican Party skeptical of the Fed's latest attempt to stimulate the U.S. economy, Bernanke may put the brakes on some of Wall Street's optimism surrounding a recent rebound in key economic data.
Having been burned before by maintaining a rosy outlook even as the housing crisis deepened, Bernanke is likely to make sure the growth trend is firmly entrenched before sounding too chipper.
Minutes from the Fed's December policy-setting meeting revealed a good deal of caution about recent improvements in the economic data, including a high threshold for curtailing the plan to buy an additional $600 billion in bonds announced in November.
While the economic outlook was seen as improving, members generally felt that the change in the outlook was not sufficient to warrant any adjustments to the asset-purchase program, said the minutes, published earlier this week.
Bernanke will most likely stick to that script before the Senate Budget Committee, even though the numbers have indeed pointed to a pickup in business activity -- and glimmers of hope on the hiring front.
He will have to explain why yields on benchmark Treasury notes have jumped 1 percentage point since the Fed's bond buys were announced, moving in the opposite direction of what was intended.
The chairman may nod to a possible short-term boost to the economy from President Barack Obama's tax cut deal with Republicans. But he might also echo his staffers' assessment that the package does not materially brighten the longer-term horizon.
It's easy and quite reasonable for him to say it's all very preliminary, and that it will be sometime before the improving trends are firmly entrenched, said Lou Crandall, chief economist at Wrightson Associates in New York.
Indeed, U.S. unemployment remains near 10 percent and economic growth -- running at 2.6 percent on an annualized basis at latest blush -- remains too weak to boost hiring significantly.
Bernanke's testimony, scheduled for 9:30 a.m. EST, will come just an hour after the Labor Department releases its closely-watched monthly employment report.
It is expected to show the economy generated 175,000 new jobs in December, which would mark the best monthly result since May. The jobless rate is expected to dip slightly to 9.7 percent from 9.8 percent.
Against that backdrop, it will hardly be a great surprise if Bernanke proves less than jubilant.
We probably need to get through two more jobs reports and he will probably use the next semiannual (testimony in February) to lay out the next phase, said Troy Davig, senior economist at Barclays Capital in New York. It would be surprising if he ventures too far from or signals anything beyond what was laid put in this week's minutes.
Given the committee's focus on budget matters, the chairman will have to walk the usual line between offering broad-strokes input on fiscal matters and wanting to avoid overstepping the boundaries of his own authority over monetary affairs.
He will likely do so by repeating the argument that long-term deficits pose a big economic challenge, but also noting that in the immediate future, sharp spending cuts could potentially derail a still-fragile recovery.
Some early Republican backpedaling on promises to reduce government expenditures suggest talk of drastic cuts is seen as mostly political theater.
As audiences go, this might be among the friendliest Bernanke will face in 2011. Later this year, he will face off against Ron Paul, the Texas congressman who has repeatedly called for the central bank to be abolished.
Bernanke, who will probably be probed about the U.S. debt ceiling, is expected to urge that it be raised in order to avoid disruptions in the government's functioning, not to mention a jittery bond market.