Federal Reserve Chairman Ben Bernanke will likely remain skeptical about the strength of the economic recovery in testimony on Tuesday, despite recent data pointing to improvement, signaling the central bank is unlikely to cut short its $600 billion stimulus plan.
The U.S. Fed chief, who testifies on the Fed's twice-yearly report on monetary policy before the Senate Banking Committee, will probably nod to improvements in the economy while indicating there is still room for monetary policy to help.
One wildcard is the recent surge in oil prices. Bernanke is likely to see that as more of a headwind to growth than the spark for broad-based inflation as long as consumers and businesses do not become gripped by inflationary psychology.
We expect continued cautious optimism about the durability of the recovery and the need for ongoing monetary policy accommodation, said Michael Gapen, economist at Barclays Capital.
Some of the Fed's more hawkish officials have said they would consider halting bond purchases ahead of the program's June deadline if a recent growth spurt persists. Bernanke has indicated he would prefer to see the plan through.
The Fed chairman, who will offer a repeat performance on Wednesday before a committee in the House of Representatives, is likely to be peppered with questions about the record U.S. budget gap.
To avoid becoming enmeshed in Washington's heated deficit debate, Bernanke will have to do the usual dodging and weaving. He has repeatedly called for long-term budgetary restraint, with a dose of caution about deep short-run spending cuts.
His testimony comes just days ahead of a possible government shutdown over ongoing budget battles, though inklings of a compromise have emerged from Capitol Hill.
In the past, Bernanke has suggested the U.S. economy might still be too fragile to handle a heavy-handed budget ax. U.S. gross domestic product grew at a 2.8 percent annual rate in the fourth quarter -- not fast enough to put a significant dent in the jobless rate, which closed out the year at 9 percent.
The bond-buying program that the Fed launched in November, which aims to keep down borrowing costs to support the recovery, has proven controversial both at home and abroad.
Emerging economies have accused the Fed of a back door dollar devaluation that amounts to a beggar-thy-neighbor policy. Domestic critics, including many Republican lawmakers, argue the policy sows the seeds of future inflation.
My fear is that today the chairman is potentially creating a bigger mess for the Fed to mop up, Republican Congressman Jeb Hensarling, a member of the House Financial Services Committee, told a Reuters Summit on Monday.
If faced with such questions, Bernanke would likely make the case that the labor market is still in too weak for economic momentum to generate inflation.
By some barometers, inflation is still running too low for the Fed's comfort. The core personal consumption expenditures price index, which strips out food and energy costs, rose just 0.8 percent in the 12 months through January, just off a record low and far beneath the Fed's presumed comfort zone of 2 percent or a bit below.
Hiring, meanwhile, remains subdued. Analysts polled by Reuters believe the economy added around 185,000 new jobs in February, up from just 36,000 last month, but not enough to appreciably reduce the jobless rate.
In such an environment, the recent spike in the price of crude oil, which traded around $97 a barrel in New York on Monday, would probably be more of a threat to consumption rather than a catalyst for price increases.
New York Federal Reserve Bank President William Dudley said on Monday that even if job growth picked up to around 300,000 a month, employment conditions would still be quite weak at the end of 2012.