Will the Fed Chairman Send Wall Street a Valentine?

Federal Reserve Chairman Ben Bernanke has yet to win the hearts and minds of many on Wall Street, but a stand-out performance during his appearance before Congress on Valentine’s Day could bring him considerably more admirers.

His speech on the economy and related Q&A session comes at a particularly important time for both the reputation of the Fed chairman and the central bank’s battle against the credit crunch and slowing economy.

“He’s beginning to get the acceptance and confidence of Wall Street, “ says Scott Rothbort, president of Lakeview Asset Management and a professor at Seton Hall University’s Stillman School of Business. “If he makes a step in the wrong direction he will lose the credibility he has built up in the past few weeks.

The timing of Bernanke's appearance before the Senate Banking Committee--which will be carried live on CNBC.com Thursday starting at 10 am New York time--is particularly important for several reasons.

First, it comes weeks after the Fed slashed interest rates twice in quick succession and a day after President Bush signed a massive fiscal stimulus package into law.

The Feb. 14 event is also a week before the release of the minutes to the Fed’s last FOMC meeting and two weeks prior to the Fed chairman’s semi-annual address to Congress.

“This becomes a very important set of remarks,” says veteran fed watcher David Jones, president of DMJ Advisors. “He needs to be very assertive.”

Much like the economy at its best, Bernanke needs to fire on all cylinders in his briefing, even though lawmakers might be inclined to devote significant time and attention to the stimulus package.

Either explicitly or implicitly, Bernanke needs to address the likelihood of more rate cuts, the lagging effects of monetary policy, the Fed’s position on inflation, lending conditions and downside risks to the economy and the Fed’s independence.

Rates And Policy

Bernanke needs to accomplish a few things in this critical area.

Even though the Fed trimmed its federal funds rate by one and a quarter points in January, the fact that the central bank’s next regularly scheduled FOMC meeting isn’t until March 18 is raising the question of another inter-meeting rate cut.

Most economists say that given what we currently know about economic conditions, such a cut is unlikely, if not out of the question, although Bernanke won’t and shouldn’t say anything that explicitly rules that out.

The markets are, however, expecting at least one, maybe two, additional rate cuts. The consensus is for a half a point reduction to 2.5 percent at the March meeting.

Economists are divided on whether the Fed boss should signal anything in that area, other than to indicate that policymakers stand ready to act if and when needed.

Jones says Bernanke should “try to disabuse the market of thinking he will cut between meetings, but he could “allude” to the fact that he’s ready to cut again, very likely at the March meeting.

“I don't think he is going to hint that more is in the cards,” counters David Resler, chief economist at Nomura International  “No one should conclude the next rate cut either in its magnitude or timing is baked in the cake.”

Having cut rates 2.25 points to 3 percent, many Fed watchers say the Fed probably can’t afford to go lower than 2.5 percent or 2.25 percent. Otherwise, rates would be equal to or lower than the rate of inflation as measured by the core rate of the personal consumption expenditures index, a key Fed gauge.

It will be “good to reinforce this is the beginning of the end,” says Jones.

Others say the appearance before Congress is a chance for Bernanke to distance himself from Wall Street and any appearance that he is bailing out banks or speculators.