For Bernanke -- and investors -- consistent message is key

(MoneyWatch) The only surprise in Ben Bernanke's appearance today before Senate lawmakers will be if he leaves anyone surprised about the direction of monetary policy.

The Federal Reserve Chairman is expected to stay on message one day after he told members of the Housing Financial Services Committee that the central bank could start scaling back its massive bond purchase program later this year before pulling the plug in mid-2014.

But that timetable could change if the economy weakens, while the Fed also plans to keep interest rates low for the "foreseeable" future, Bernanke reaffirmed in seeking to soothe jittery financial markets. He said yesterday that "if financial conditions -- which have tightened recently -- were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer."

Bernanke is scheduled to address the Senate Banking Committee at 10:30 a.m. Eastern Daylight Time.

The economy, which grew a paltry 1.6 percent in the first three months of the year, slowed even more in the April-to-June period, according to economic forecasts. The economy expanded at a rate of 0.7 percent in the second quarter, Macroeconomic Advisers estimates. The research firm and other forecasters expect growth to accelerate in the second half of the year. For all of 2013, the White House projects economic growth of 2 percent.

The biggest risks for the economy are a larger-than-expected hit from government spending cuts and tax hikes,  persistently low inflation, rising mortgage rates, and a slowing global expansion, Bernanke said Wednesday. Labor market conditions are likely to be the greatest influence on Fed policy. The economy has added an average of 202,000 jobs per month over the first half of the year. Although this pace of job-creation is not enough to quickly lower unemployment from its current rate of 7.6 percent, it is likely strong enough for the Fed to ease back on bond purchases later this year.

"The key expectation, we think, is that payroll growth remains very close to, or better, than the 200K per month trend," said economist Ian Shepherdson of Pantheon Macroeconomics, in a note to clients. "If that happens -- and we think it is the most likely single scenario for the next few months -- we expect tapering to begin in September, even though the second quarter GDP numbers will be disappointing."

Investors are closely monitoring the Fed's pronouncements for clues about when it intends to dial back on "quantitative easing," as the monetary stimulus program is called. The central bank turned to such bond purchases in 2008 in order to keep a lid on longer term interest rates and boost economic activity. But pressure has grown within the Fed to ease back on the purchases.

• Bernanke: Fiscal policy is stunting the recovery
• Despite stronger growth, recovery still a long march
• Stocks gyrate as U.S. economy nears crucial test

If Bernanke is eager to clarify where Fed policy is headed, he is equally wary of limiting the bank's options. He is expected to echo that QE3 is not on a "preset course" and depends on economic and financial developments.

"On the one hand, if economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly," he said Wednesday. "On the other hand, if the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2 percent, or if financial conditions... were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer."

Most analysts expect the Fed to begin tapering its asset purchases by year-end, likely following the Federal Open Market Committee's mid-September meeting. As Bernanke and other Fed officials have sought to underline, that does not augur an immediate rise in interest rates. Rates are not likely to start increasing until 2015 at the earliest, experts say.

Bernanke said last week in a speech that the Fed would not automatically raise the benchmark federal funds rate, the rate for intrabank loans, once the jobless rate fell to 6.5 percent and inflation topped 2.5 percent. Rather, the bank will merely consider these thresholds in exploring whether to push rates up.