Federal Reserve Chairman Ben Bernanke goes before Congress on Wednesday to deliver testimony on the U.S. economy that financial markets will scour for clues on where interest rates are heading.

But analysts said markets may well be disappointed - unless a surprisingly strong reading on core consumer prices forces Bernanke's hand.

Fed officials have gone to pains to emphasize that policy is data dependent, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.

But Chandler said so far, the economic data since the Fed lifted benchmark overnight rates on June 29 for a 17th straight time has done little to clarify the future policy path.

Bernanke's task when he appears before the Senate Banking Committee to present the Fed's semi-annual monetary policy report is particularly complicated because the central bank is wrestling with with higher inflation and slowing growth.

He is likely to suggest the Federal Reserve believes a return to more moderate growth will reduce inflationary pressure, but that there is a risk inflation will persist and that the Federal Reserve is committed to restraining it, said Lynn Reaser, chief economist at Banc of America Capital Management in Boston.

Interest rate futures markets put about a 60 percent chance on the prospect of a rate increase at the Fed's upcoming meeting on August 8, little changed since the central bank took overnight rates up to 5.25 percent in June.

Those odds could well shift, however, when the government issues consumer price data for June just 1-1/2 hours before Bernanke's scheduled 10 a.m. (1400 GMT) testimony.


Many at the Federal Reserve would like to pause in August to allow the economy to catch up with previous rate hikes, but an adverse number on the core consumer price index might force another rate increase, Reaser said.

They obviously do not want to tie their policy to one indicator, particularly an indicator that is more backward, or concurrently looking than forward-looking, but at the same time they have to be very worried about inflationary expectations.

Economists said Bernanke would likely tweak his testimony depending on the figure for the core CPI, which excludes food and energy costs. In addition, he will have an opportunity to hone his message in a second day of testimony before a House of Representatives panel on Thursday.

The core CPI has risen a surprisingly steep 0.3 percent for three straight months and Fed officials have made clear they are troubled by the acceleration.

If it's 0.3 or above, the markets are already going to be selling off and I suspect that he will have to sound a bit more reassuring to the market that the Fed is going to make sure that inflation is not a problem ... and that would imply a rate hike on August 8, said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh.

However, if the core CPI comes in at 0.2 percent, as Wall Street expects, analysts will be left to scour the details of Bernanke's testimony and the accompanying Fed report to try to gauge which way the winds are blowing at the central bank.

In that regard, Hoffman said, the forecasts for growth and inflation in the semiannual report could prove constructive.

If the Fed comes out and reaffirms its forecast that core inflation should be back below 2 percent next year, I think the markets would feel reassured by that, he said.

Conversely, if Fed officials revise their 2007 inflation forecast higher from the 1.75 percent to 2 percent contained in their February report, Hoffman said that would imply more work ahead on interest rates to ratchet it down.