Bernanke faces grilling on fiscal stimulus stance

WASHINGTON (Reuters) - Ben Bernanke has tried hard not to follow his predecessor Alan Greenspan into the political arena by commenting on fiscal policy, but the Federal Reserve chief will find it difficult to stay above the fray this week.

Bernanke testifies to Congress on Thursday amid a chorus of election year demands for action to stop the U.S. economy from being tipped by a slumping housing market into recession.

"He said that fiscal stimulus is certainly needed and that he would be generally supportive of the Congress and the president enacting such a stimulus," Sen. Charles Schumer, a New York Democrat said on Wednesday, referring to a conversation he had with Bernanke on Monday.

"He said that while he wasn't going to endorse a specific plan, if an economic stimulus package was properly designed and enacted so that it enters the economy quickly, it could have a very positive effect," Schumer said at a congressional hearing.

An aide to a Republican member of the House of Representatives Budget Committee, which will hear from Bernanke at 10 a.m. (1500 GMT) on Thursday, said the Fed chief would be quizzed about the risks of a "quick band-aid solution" bringing "significant harm to the longer-term budget outlook."

But he will also be asked about potential benefits of getting a stimulus package together quickly.

"I will ask him what steps he believes are necessary to address the problems troubling our economy," said Rep. John Spratt, the Democrat from South Carolina who chairs the budget panel.

"The Federal Reserve has been easing monetary conditions in response to this slowdown, but Congress and the president must move quickly to enact a fiscal stimulus plan as a complement to the Fed's actions," he said in a statement on Tuesday.

The Fed has slashed its key interest rate by a full percentage point since mid-September and financial markets expect Bernanke on Thursday to restate his remarks of January 10 "to take substantive additional action as needed to support growth".

This was read by markets as a signal to expect a half-percentage point interest-rate cut at the Fed's next meeting on January 29-30. Bernanke's words on the economy will be examined closely for any sign of a shift in tone.

BRING BACK KEYNES

President George W. Bush has said he was considering whether the economy was in need of a fiscal boost, and lawmakers of both parties have begun to scramble to consider what might be done.

The U.S. Congressional Budget office said on Tuesday that a well-designed stimulus package that got money into the hands of lower- and middle-class families, who are the most likely to spend it, would stand the best chance of working.

Greenspan drew heavy fire for backing the tax cuts Bush proposed in 2001 while he was Fed chairman and Bernanke said right from the start that he would take a different tack.

"Given the uncertainty around monetary policy, it doesn't help him (Bernanke) to get embroiled in a political controversy over fiscal policy," said Tom Gallagher, senior managing director at ISI Group in Washington.

"He will avoid going as far as Greenspan did, but it will be hard for him to stay out of the debate entirely," he said.

Asked about fiscal policy during his Senate confirmation hearing in November 2005, Bernanke pleaded it was not his business.

"I believe that it is within my purview to discuss broad issues of the share of government spending and (Gross Domestic Product), the share of taxes and GDP, deficits, fiscal stability, those issues," he told the Senate Banking Committee, adding: "What I would like to do is to refrain from making recommendations on specific matters of taxes and spending."

So far, Bernanke has mainly stuck to broad observations: balanced budget good, deficit bad; reform Medicare and Social Security while there is still time. In fact, his congressional testimony last January was all about the need to tackle rising entitlement spending.

He has managed to dodge specific recommendations on how best to balance taxation and spending -- intrinsically political issues -- but will find it hard to duck a topic that has become central in the 2008 presidential election campaign.

"This falls under the heading of short-term macro management and that is the Fed's business," said Lou Crandall, chief economist at Wrightson-ICAP in Jersey City, New Jersey.

As apolitical as the Fed chairman tries to remain, he cannot ignore what is going on in Washington. Nor can he afford to be entirely agnostic about the perils of blocking a fiscal boost if there is some chance that it might help offset a recession for which he would otherwise be blamed.

"He is not going to take sides on how to split up the pie, and I think his advice is going to be to go slow, because a fiscal stimulus package may not be needed ... but I don't think he wants to stand in the way of one," Crandall said.

(Additional reporting by David Lawder, Donna Smith and Rick Cowan; Editing by Andrea Ricci)