(Reuters) - Federal Reserve Chairman Ben Bernanke on Wednesday is expected to balance a message of enduring central bank support for the U.S. economy with a reminder that the Fed's ultra-easy policies cannot last forever.
The head of the U.S. central bank will probably seek to use his testimony to Congress on monetary policy to calm the nerves of jittery investors worried about life without the Fed's $85 billion in monthly bond purchases.
Bernanke set off a brief but fierce global market sell-off last month when he outlined plans to reduce the quantitative easing program, and he has joined a slew of Fed officials since then who have spelled out their intention to keep interest rates near zero well after the asset purchases end.
"They are trying to finesse this idea of a possible near-term scaling back of QE with the message that they're going to stay super accommodative for a long time," said Robert DiClemente, managing director of economic and market analysis at Citigroup.
"That's a tough line to walk."
The hearing on the Fed's semiannual monetary policy report before the House of Representatives Financial Services Committee begins at 10 a.m. (1400 GMT). But the panel plans to make Bernanke's prepared remarks public at 8:30 a.m. (1230 GMT), an hour before U.S. stock markets open.
A second hearing is scheduled for Thursday with the Senate Banking Committee, setting up a two-day communications challenge for a Fed that has struggled in the last couple of months to clarify its policy intentions - and that has even gone so far as to accuse financial markets of over-reaction.
Under the timeline Bernanke gave on June 19, Fed policymakers expect to reduce their monthly bond buys later this year and to halt them altogether my mid-2014, as long as the economic recovery unfolds as expected.
Bernanke's comments last month sparked a sell-off in riskier assets, and yields on the benchmark 10-year U.S. Treasury neared a two-year high. The sell-off has since abated in part thanks to soothing comments from central bankers both here and in Europe who tried to assure investors that policies would remain easy for a long time to come.
The Fed has held overnight interest rates near zero since December 2008, while more than tripling its balance sheet to about $3.46 trillion with a series of bond purchase programs.
While the end of the Fed's bond buying appears in view, officials have emphasized that they will keep rates near zero at least until the unemployment rate falls to 6.5 percent, as long as inflation remains in check. Most do not expect rates to rise until sometime in 2015.
Last week, Bernanke said a "highly accommodative policy is needed for the foreseeable future" because inflation is low, near 1 percent, and unemployment high. The jobless rate stood at 7.6 percent last month.
Since then, data has shown that inflation firmed last month and that confidence among home builders soared to a 7-1/2 year high this month.
Still, retail sales were weak in June, and second-quarter GDP is expected to come in at around a dismal 1 percent annual rate, painting a very mixed picture for Bernanke as he faces two days of questions from lawmakers.
The Fed chairman, whose second term expires in January, may be asked about his future plans, given widespread speculation that he is not interested in a third four-year term.
Lawmakers could also try to pin him down on when, and by how much, the accommodative bond-buying will be trimmed.
"Bernanke will likely speak tomorrow about the slow economic growth, but it's too early for the Fed to tip its hands on the calibration of QE3," said Robert Dye, chief economist at Comerica in Dallas. "They want to see as much data as possible before making that commitment."
Complicating things, minutes from the Fed's June meeting showed about half of the central bank's 19 policymakers expected to end the bond purchases before the end of the year. That would be at least six months before Bernanke said the narrower 12-member policy-setting committee predicted it would happen.
The purchases are meant to depress longer-term borrowing costs and spur investment, hiring and economic growth.
Although the second quarter is shaping up to be even weaker than the already disappointing first quarter, job growth has been reasonably strong, and most Wall Street economists now expect the Fed will trim QE at its September meeting. There is another policy meeting set for July 30-31.
In a note to clients, RBS strategists wrote that Bernanke needs to address the question of timing on Wednesday.
"I suspect the jury is still out at the Fed, so (Bernanke is) likely to tell us they are data dependent and tapering is coming some time over the next several meetings, leaving the markets a bit in the wind, volatile, and back to data watching."
Additional reporting by Richard Leong in New York; Editing by Tim Ahmann and Dan Grebler