Federal Reserve Chairman Ben Bernanke this week will offer assurance that help is on the way for the troubled U.S. economy and may offer clues on additional steps that could be taken to halt an ever-steepening dive.

With U.S. stocks closing at 6-1/2-year lows on Friday on fears big banks will be nationalized, Bernanke will likely be pressed on government plans to clean up the financial sector when he delivers the Fed's semiannual monetary policy report to Congress in two days of testimony on Tuesday and Wednesday.

In addition, the Fed chief will face the challenge of making the case that the U.S. central bank, which has chopped interest rates to near zero and flooded markets with hundreds of billions of dollars, still has the ammunition to pull the economy out of its worst downturn since the early 1980s.

He's going to talk about the Fed still having tools in its tool kit and that it will do whatever it can to get the economy going, said Joseph LaVorgna, an economist for Deutsche Bank Securities in New York.

After bringing its main policy lever, the overnight interbank lending rate, as low as it practically can go in December, the Fed has largely ceded the spotlight to the new administration of President Barack Obama.

Obama has already signed into law an almost $800 billion government stimulus package and his team has rolled out bank and housing rescue plans.


Even so, the Fed remains busy behind the scenes and is counting on two massive programs to help spur consumer lending and stir some revival in the depressed housing market.

In one of these, the central bank has begun buying up to $600 billion worth of debt and mortgage securities backed by government-related mortgage finance providers, a program that has helped drive down mortgage costs.

In the other, the Fed is poised to throw a life-line to consumers with an initiative aimed at making it easier to get loans for homes, cars and on credit cards that could be up and running within a couple weeks.

Originally envisioned to provide $200 billion dollars to support lending, the Fed and Treasury said on February 10 that they were ramping up the program to as much as $1 trillion, with the Treasury agreeing to put up $100 billion to protect the central bank from potential losses.

But the economic picture has grown dimmer almost without letup despite the flood of money to financial institutions and promises of cash for households and consumers.

Fed officials acknowledged at their policy-setting meeting at the end of January that the economy was likely to shrink this year and that unemployment would rise to near 9 percent.

Offering a particularly downbeat assessment, officials said they saw no signs of stabilization in the housing market and warned any recovery would be unusually gradual and prolonged.

Bernanke may face some ire from lawmakers whose constituents are being pummeled by plunging stock and home values and who think the government has bungled its efforts to stabilize the economy.

Disappointment with the prospect of immediate policy responses has helped remove the floor from markets, Dominic Wilson of Goldman Sachs wrote in a note to clients.


For financial markets, Bernanke's views on how best to clean up the banks will be eyed particularly closely.

The week before last, Treasury Secretary Timothy Geithner sketched out plans for a public-private partnership to mop up bad mortgage-related debts clogging the banking system. But he provided scant details on how his plan would work and markets tanked as investors' hopes for bold, quick action were dashed.

Markets will also be listening for any clues on whether the Fed might still be considering buying long-term U.S. government bonds as a way to drive down borrowing costs.

The Fed raised that possibility in December and said after its January 27-28 policy meeting that it was prepared to take that step if it believed it would be particularly effective in improving conditions in private credit markets.

Bernanke, however, has not mentioned the possibility of bond purchases in his last two public outings, and many observers think the Fed may be tip-toeing away from the idea.

The minutes from the Fed's last meeting suggested the central bank was more likely to expand its mortgage-support efforts, since they have already proven effective, and officials have said they want a chance to gauge the impact of their unfolding actions before taking further steps.

(Editing by Maureen Bavdek)