Though it is commonly agreed that the Fed was a bit late in cutting rates in the first place and could have cut more deeply earlier in the cycle, it has nevertheless been aggressive in sum.
"At the January meeting, they sort of hinted that we've done a lot," says economist Ram Bhagavatula, who is managing director at the hedge fund Combinatorics Capital.
Resler says Bernanke needs to “underscore that monetary policy works with long and variable lags.”
The Fed began cutting rates six months ago, which is widely considered the least amount of time it takes to see results from policy moves.
“The market has to stop squealing and let the process work itself out,” says Jim Awad, chairman of WP Stewart Asset Management. “Three percent and time should solve the problem. I'm hoping the Fed has the fortitude to stop and let whatever pain that has to be taken be taken.”
Jones and others note that the rate cuts and the Fed’s other measures have achieved tangible results such as a steeper the yield curve, as seen in the spread between the two-year and ten-year Treasury notes.
Crunch and Contraction
Around the time of the Fed's two rate cuts in January, it became clear to many that the central bank was concerned as much about the credit crunch as it was about the economic slowdown and its negative impact on the financial markets.
The Fed’s statement after its inter-meeting rate cut used the word “appreciable downside risks to growth.” Its statement after the January FOMC meeting mentioned financial markets “under considerable stress” and “tightened” credit in the first paragraph before describing the real economy.
Economists say look for more of the same Thursday, even though Bernanke has to be careful not to make any material changes that might either scare people about the depth of the problem or suggest an imminent change in policy.
“He needs to indicate that “we're now in a position where we're beginning to get our arms around the mortgage side of the crisis and we need to get the banks back to lending to people who are credit worthy,” says Rothbort.
Jones calls the January period a “point of departure” for the Fed in that it made it clear the housing contraction and subprime problem had spread, creating something of a “gloomy assessment"
“I would expect him to say exactly the same themes,” he adds.
As Resler puts it, Bernanke will acknowledge that “things are worse than they were but not worse than their revised expectations,” as he did in late January.
One burning question that may not be posed to Bernanke is what, if anything, did the Fed know about the economy when it hastily cut rates a week before its January FOMC meeting.
The Fed subtlety toned down its position on the risk of inflation between its December and January FOMC statements, but in a Jan. 10 speech, Bernanke was crystal clear about the Fed not dropping its guard against inflation or damaging its inflation fighting credentials.
Economists say Bernanke should and will mention inflation in his prepared comments but won’t stray from what FOMC members penned in their Jan. 30 statement.
“They are certainly playing it down,“ observes Bhagavatula. “If he starts raising the issue of inflation -- unless he wants to raise more questions about his credibility -- he's putting a halt to the easing,
More than a few economist say the Fed’s aggressive rate-cutting policy has increased the possibility of a serious outbreak in inflation down the road – especially with a fiscal stimulus package in the economic pipeline -- but believe Bernanke is taking a calculated risk there, given the enormous downside potential of the credit crunch.
“I would barely mention it [inflation],” says Jones, who was an early advocate of aggressive easing in general and of an inter-meeting rate cut in particular. He calls the sustained upward pressure on oil prices “Bernanke’s dilemma.”
For all the debate on Bernanke’s policy moves, there’s a growing sense that the credit crunch may be more than the Fed can handle, regardless of the recession question.
Even Bernanke’s critics admit he faces an unusually tough assignment in fighting the great unknowns of the credit crunch. Others – not necessarily big supporters – say he has learned from his mistakes of last year.
“I don't think Fed is behind the curve any longer, nor do I think it is ahead of it,” says Resler.