* Bernanke likely to confirm Fed is on easing path
* Reform course in balance as Italy goes to polls
* Will Bank of Japan get a committed deflation fighter?
By Alan Wheatley, Global Economics Correspondent
LONDON, Feb 24 This week should bring clarity on
three major issues hanging over the world economy: might the
Federal Reserve withdraw monetary stimulus sooner rather than
later? Will Italy elect a stable, reform-minded government? Will
Japan pick a central bank chief determined to end deflation?
After a set of Fed minutes last week initially interpreted
as hawkish, most economists expect Chairman Ben Bernanke to use
an appearance before Congress to reaffirm that, in the words of
St. Louis Fed President James Bullard on Friday, "Fed policy is
very easy right now and is going to stay easy for a long time".
The U.S. central bank is committed to making open-ended bond
purchases, currently $85 billion a month, until unemployment
falls to 6.5 percent from 7.9 percent now as long as inflation
does not top 2.5 percent.
But parts of the financial markets have been red hot,
prompting some Fed policy makers to wonder whether to start
reversing policy before the unemployment target is reached.
The labour market has been slowly improving, with 200,000
new jobs a month added on average between November and January.
But the encouraging trend will go into reverse if deadlock in
budget talks triggers across-the-board federal spending cuts on
Ethan Harris, an economist with Bank of America Merrill
Lynch in New York, estimates that the cuts would slow the pace
of growth by 1.5 percentage points to just 1 percent next
quarter, with job growth averaging less than 100,000 per month.
With the U.S. economy still not out of the woods, the Fed
will probably not raise short-term interest rates from their
present range of zero to 0.25 percent before early 2015, said
Nariman Behravesh, chief economist at IHS Global Insight in
But he expects Bernanke to make a nod to the unease among
some of his colleagues about the open-ended nature of the Fed's
asset purchases when he testifies to lawmakers on Tuesday and
"As an acknowledgement of some of the growing concerns about
the potential impact of all this liquidity getting pumped into
the economy, he will probably say more about exit strategies and
more about keeping an eye on inflationary pressures than he has
done before," Behravesh said.
By the time Bernanke speaks, investors should know the
result of Italy's general election, held over Sunday and Monday.
The outcome is highly uncertain.
Centre-left leader Pier Luigi Bersani is expected to garner
most votes but might not be able to form a stable majority - a
potential recipe for renewed worries about the euro zone as a
whole given Italy's stagnant economy, woeful productivity and
fast-rising labour costs.
Even in the event of a hung parliament, however, a solution
would be found to form a government that can continue Italy's
painful reform process, according to Riccardo Barbieri, chief
European economist with Mizuho in London.
"This does not mean that the elections are irrelevant: they
are critically important, as they will determine the degree of
'ownership' of the reform programme, its ultimate chances of
success, and thus the performance of the economy and the
sustainability of public debt," he told clients.
JAPAN'S ABE CHOOSES
With its low growth and high government debt, Italy shares
two important characteristics with Japan.
The latter's new prime minister, Shinzo Abe, is drumming up
political support in Tokyo to appoint a central bank chief
wholeheartedly committed to ending two decades of debilitating
deflation. An announcement is due this week.
Despite Abe's clear election mandate to root out deflation,
Behravesh acknowledged that the Bank of Japan has a long history
of dragging its feet on the matter. There was also a question
whether Abe would be able to deliver effectively the massive
fiscal stimulus he has promised.
"That said, I'm a little more worried about Italy than
Japan," he said. "Japan has a pretty good shot of having
positive growth this year. Italy does not."
On the data front, revised figures are likely to show that
the U.S. economy eked out modest growth last quarter, rather
than contracting as initially thought; January's durable goods
orders probably gave back most of December's chunky gain.
China's official purchasing managers' index for February is
forecast to have held above the 50 mark that signals expansion,
while economists hope the budgets of South Africa and, in
particular, India will stress long-awaited structural reforms.
As India's is the last full-year budget before a general
election due in May 2014, Finance Minister Palaniappan
Chidambaram will want to please voters. At the same time, Fitch
and Standard and Poor's are reviewing India's investment grade
credit rating for a possible downgrade to junk status.
"As such, we expect the government to announce some populist
schemes, but all within the limits of fiscal prudence,"
economists at Nomura said in a report.