Feb. 13 (Bloomberg) -- Gentle Ben he won't be.

Ben Bernanke, appearing before Congress this week for the first time since becoming Federal Reserve chairman Feb. 1, is likely to brush aside lawmakers' calls for a pause in the central bank's credit-tightening campaign and vow vigilance against inflation, analysts say.

Cementing the Fed's inflation-fighting credibility at a time of regime change at the central bank is particularly important because some in the markets are already suspicious that Bernanke will be soft on inflation. Behind those concerns: Bernanke's suggestion in 2002 that the Fed would pull out all stops if needed to fight a deflationary downturn in the economy, a strategy he compared to a ``helicopter drop'' of money.

``He's given his helicopter speech and established his anti- deflation credentials,'' says Tom Gallagher, Washington-based senior managing director at ISI Group, a New York money- management and research firm. ``Now he's got to give his howitzer speech and establish his anti-inflation credibility.''

There's a lot at stake. If investors fear that Bernanke, 52, won't keep inflation in check, they'll sell bonds, driving long- term interest rates higher. The dollar could also suffer as foreigners cut back on their purchases of the U.S. currency.

``If the dollar starts to deteriorate, it could easily turn into a new-chairman jitters story,'' says Louis Crandall, chief economist at Wrightson ICAP, an economic-research company in New York. ``He'll want to avoid that.''

Inflation Expectations

With the economy gathering momentum, inflation expectations have already heightened. The gap between yields on 10-year Treasuries and inflation-linked government debt with similar maturities widened 0.2 percentage point in January, the most in 20 months, to 2.53 percentage points. The gap was about 2.5 percent on Feb. 10.

Inside the Fed, officials have begun to debate whether the unemployment rate has fallen too far, running the risk of stepped-up wage demands by workers and ultimately faster inflation. At 4.7 percent in January, the jobless rate has fallen to a level that many Fed economists consider the equivalent of full employment.

Building a reputation as an inflation fighter will be critical if Bernanke is to be as successful as his predecessor Alan Greenspan in managing the ups and downs of the economy. So long as consumers and companies are convinced that price pressures will remain in check, the central bank can focus on keeping the economy growing and handling financial crises such as the risk of a dollar free-fall.

Credibility

``If the Fed can maintain credibility for sustained, low inflation, it will have more leeway to work to stabilize the economy,'' says J. Alfred Broaddus Jr., president of the Federal Reserve Bank of Richmond from 1993 to 2004.

Speaking to a St. Louis Fed conference in 2004, Bernanke, then a Fed governor, highlighted the benefits of being perceived as tough on inflation. ``Increased credibility allows the central bank to achieve low inflation at a lower cost'' to the economy, he said.

Keeping that sort of reputation won't be easy. Lawmakers, worried that the Fed's 14 straight interest-rate increases will slow economic growth unduly in a congressional election year, are likely to press Bernanke for a break when he appears before the House Financial Services Committee on Feb. 15 and the Senate Banking Committee on Feb. 16 to deliver the Fed's semi-annual report to Congress.

Pressure From Lawmakers

``The Fed has now raised short-term interest rates to a level that increases my concerns about the economy,'' New Jersey Republican Representative Jim Saxton, chairman of Congress's Joint Economic Committee, said Jan. 31. ``I hope the Fed pauses in ratcheting up interest rates.''

Republicans, who control both the House and Senate and have seen their standings drop in public-opinion polls, aren't the only ones who are uneasy about the Fed's strategy. Some Democrats are too.

``I urge the Fed to consider taking a pause from what has been a steady upward push in interest rates,'' Senator Paul Sarbanes of Maryland, the Banking Committee's ranking Democrat, said Jan. 27 during debate on Bernanke's nomination as Fed chief.

Senate Banking Committee Chairman Richard Shelby says he isn't among lawmakers on Capitol Hill who want the Fed to spur the economy by keeping rates low. ``Some people believe we should have a hot economy at any price,'' the Alabama Republican said in a Feb. 8 interview. ``I don't think we should.''

`Body Armor'

Congressional pressure for a halt to interest-rate increases might be even greater now that Greenspan is gone. Kevin Hassett, an economist with the American Enterprise Institute in Washington, says Bernanke ``is entering the fray without the supreme body armor of super credibility that Greenspan developed over the years.''

Bernanke also has something to prove to his fellow policy makers at the Fed, where Greenspan's departure may embolden others to try to put their stamp on monetary policy. ``The guy who's kept them on a leash'' has ``disappeared,'' says Lawrence Lindsey, a former Fed governor and chief economic adviser to President George W. Bush who now heads his own consulting group. ``Bernanke is going to have a truly difficult transition.''

The former Princeton University professor has taken over a Fed that was already leaning toward higher interest rates. In raising rates to 4.5 percent on Jan. 31, the central bank said ``some further policy firming may be needed'' to keep growth and inflation in balance.

``There are risks to the inflation outlook,'' Chicago Fed Bank President Michael Moskow said in a speech to the Risk Management Association of Chicago on Feb. 9. ``Changes in policy may be appropriate.''

Greenspan Weighs In

Even Greenspan has weighed in. At a private dinner on Feb. 7 with clients of Lehman Brothers Holdings Inc. in New York, the 79-year-old former Fed chief suggested that short-term interest rates may need to rise further, a person briefed by a participant at the meeting said.

There are risks to Bernanke's taking a tough stance against inflation. If he raises rates too far, he runs the danger of bursting what Yale University economist Robert Shiller has called the biggest property bubble ever.

Already, there are signs the housing market is cooling off. Toll Brothers Inc., the largest U.S. builder of luxury homes, said on Feb. 7 that fiscal first-quarter orders plunged 29 percent as buyers waited to see whether prices would fall.

Fed staff economists are convinced that the economy is strong enough to withstand a slowdown in the housing market. Armed with their reassurances, Bernanke is likely to try to burnish his inflation-fighting credentials.

``He's going to err on the side of hawkishness, not dovishness,'' Lindsey says.

To contact the reporter on this story: Rich Miller in Washington rmiller28@bloomberg.net

Last Updated: February 13, 2006 00:12 EST