Congress to hear Bernanke and Paulson

By Mark Felsenthal

WASHINGTON (Reuters) - Discussion of persistent financial market turmoil is seen as likely to overshadow the Federal Reserve's semi-annual monetary policy outlook when Fed Chairman Ben Bernanke testifies before Congress on Tuesday.

Bernanke is due to present semi-annual monetary policy to the Senate Banking Committee at 10 a.m. EDT (3 p.m. British time).

In a sign lawmakers want to hear more about current financial strains and an unprecedented government show of support for embattled mortgage finance markets, the panel on Monday added Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox to the witness list.

The Fed said in late June that the risks that growth will sputter have diminished while concerns that inflation might spike higher have gained.

The U.S. central bank has held interest rates steady at 2 percent since April after lowering them from 5.25 percent, since last August. Policy-makers have indicated they prefer not to lower rates further and are waiting for an opportunity to raise borrowing costs to squelch troubling inflation.

But financial market turmoil has intensified and is likely to preoccupy lawmakers on Tuesday and the next day, when Bernanke delivers the Fed report to the House Financial Services panel.

Nervousness about market stability is rife after the government took over failed bank IndyMac IMB.N on Friday and the Treasury Department and the Fed announced steps aimed at reassuring markets they stand squarely behind mortgage finance enterprise providers Fannie Mae (FNM.N) and Freddie Mac (FRE.N).

Stock indexes have tumbled into bear market territory as financial firm share prices have plummeted over worries about exposures to delinquent loans.