Hoping for answers to three big questions

After a set of Fed minutes last week initially interpreted as hawkish, most economists expect Chairman Ben Bernanke to use an appearance before Congress to reaffirm that, in the words of St. Louis Fed President James Bullard on Friday, “Fed policy is very easy right now and is going to stay easy for a long time.”

The U.S. central bank is committed to making open-ended bond purchases, currently US$85 billion a month, until unemployment falls to 6.5 percent from 7.9 percent now as long as inflation does not top 2.5 percent.

But parts of the financial markets have been red hot, prompting some Fed policy makers to wonder whether to start reversing policy before the unemployment target is reached.

The labor market has been slowly improving, with 200,000 new jobs a month added on average between November and January. But the encouraging trend will go into reverse if deadlock in budget talks triggers across-the-board federal spending cuts on March 1.

Ethan Harris, an economist with Bank of America Merrill Lynch in New York, estimates that the cuts would slow the pace of growth by 1.5 percentage points to just 1 percent next quarter, with job growth averaging less than 100,000 per month.

With the U.S. economy still not out of the woods, the Fed will probably not raise short-term interest rates from their present range of zero to 0.25 percent before early 2015, said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Mass.

But he expects Bernanke to make a nod to the unease among some of his colleagues about the open-ended nature of the Fed's asset purchases when he testifies to lawmakers on Tuesday and Wednesday.

“As an acknowledgement of some of the growing concerns about the potential impact of all this liquidity getting pumped into the economy, he will probably say more about exit strategies and more about keeping an eye on inflationary pressures than he has done before,” Behravesh said.

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