July 17 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke may deliver his fellow Republicans a message they'd rather not hear when he gives Congress his monetary-policy report this week: The economy is slowing and inflation remains a risk.

President George W. Bush and his Republican colleagues, trailing in the opinion polls, are counting on the strength of the economy to help them retain control of Congress in the November elections. A slowing economy -- in response to repeated Fed interest-rate increases -- will undercut that campaign theme.

``They're certainly going to be blamed if the economy slows down,'' says Karlyn Bowman, a polling expert at the Republican- leaning American Enterprise Institute in Washington. ``That's something they need to worry about.''

There are signs they do. ``The Fed should take a break from any further rate increases,'' says Representative Don Manzullo, an Illinois Republican and a member of the House Financial Services Committee. ``Manufacturing is just starting to recover.''

Kevin Hassett, who works with Bowman at AEI and who was chief economic adviser to Republican Senator John McCain of Arizona during the 2000 presidential primaries, says some Republican lawmakers are ``nervous'' about Bernanke's handling of the economy. ``They're worried about whether he's up to the job,'' said Hassett, who's also a columnist for Bloomberg.

The Republicans risk losing control of at least one house of Congress for the first time since 2002. A Bloomberg/Los Angeles Times poll last month showed voters prefer Democrats over Republicans in contests in their congressional districts by 49 percent to 35 percent. Democrats would need to gain 15 seats to control the House, and six to control the Senate.

Bernanke's Report

Lawmakers will get a chance to grill Bernanke, 52, when he appears before the Senate Banking Committee on July 19 and the House Financial Services Committee the following day to present the Fed's semi-annual economic report to Congress.

Senator Robert Bennett, a Utah Republican who serves on the Banking Committee, expects Bernanke to offer few clues on interest rate policy.

``We've had the longest string of rate increases in memory, maybe in history,'' Bennett told reporters July 11. ``Naturally, everybody wants to guess whether or not there's going to be another increase in the overnight rate, and naturally he won't tell us. But at least we can probe the overall question of where we are.''

`Steep Ascent'

The Fed's 17 rate increases, bringing the target to 5 1/4 percent, constitute ``a pretty steep ascent,'' says Republican Representative Spencer Bachus. ```If you get to 5 3/4 or 6 percent, it's going to go from being uncomfortable to being unsustainable.''

The Alabama lawmaker, a member of the House Financial Services Committee, says he gives Bernanke and the Fed high marks for dealing with a challenging economy.

Others aren't so kind. Republican Senator Jim Bunning, a long-time Fed critic, says he intends to confront Bernanke at this week's hearing about the problems he's causing the economy by continuing to raise rates.

The Kentucky senator has called Bernanke an ``amateur'' and blasted the former Princeton University professor for unnerving markets with his anti-inflation rhetoric. ``He's been in a cocoon of academia and is not ready for prime time,'' says Bunning.

The unease is shared by some Democrats. ``I think this has been overly aggressive,'' Connecticut Senator Chris Dodd told reporters on July 11. ``Because he's new and probably less sure of himself in these matters, he's leading the Fed to be a bit more over-reactive.''

Failure to Communicate

Bernanke has had a tough time communicating his intentions since taking over as Fed chief on Feb. 1 after serving as chairman of Bush's Council of Economic Advisers. Stock, bond and commodity markets have been whipsawed as Bernanke has tacked back and forth between sounding inflation alarms and suggesting the Fed was ready to take a break from raising rates.

``The Fed is saying they don't know whether interest rates are too high or too low,'' says Mark Gertler, head of New York University's economics department, who wrote a series of papers with Bernanke when the chairman was a professor at Princeton. ``Policy is going to depend on the data.''

Bernanke will probably try to avoid getting pinned down on whether the Fed is ready to end its two-year-old campaign to increase interest rates.

``He'll want maximum flexibility to fight whatever economic war he feels he needs to,'' says Ethan Harris, a former Fed official who's now chief economist for Lehman Brothers in New York.

Inflation

Led by a 30 percent surge in energy costs, consumer prices through the first five months of the year have risen at a 5.2 percent annual clip, versus 3.4 percent for all of last year. Even after stripping out volatile food and energy costs, so- called core inflation has accelerated, to a 3.1 percent annual pace through the first five months of 2006 from 2.2 percent in 2005.

``The firming of inflation has been stronger than the Fed expected,'' says Brian Sack, a former central bank official who's now a senior economist with St. Louis-based consultants Macroeconomic Advisers. ``They're uncertain what's behind it.''

Compounding the uncertainty, the government will release consumer price data for June on the morning of Bernanke's July 19 Senate appearance. The Fed chairman will get the statistics the night before, and might comment on them in his opening testimony. More likely though he'll wait until he's asked by a lawmaker.

At the same time that inflation has risen, the economy is slowing. The median forecast of 51 economists surveyed by Bloomberg News this month has annual growth slowing to 2.8 percent in the second quarter and through the end of the year, from 5.6 percent in the first.

Welcoming a Slowdown

From the Fed's perspective, the slowdown is welcome because it will help ease pressure on inflation. Others worry it might go too far.

Three industry groups in Washington -- the National Association of Manufacturers, representing 14,000 companies, the National Association of Realtors, with 1.3 million members, and the 225,000-strong National Association of Homebuilders -- have all urged the Fed in the last month to take a break from raising rates.

``We're very worried about the consumer getting hit,'' says David Lereah, chief economist at the NAR.

So too are lawmakers, especially Republicans, who would take the blame if the economy nosedives in response to tighter credit from the Fed.

Representative Barney Frank, a Democrat from Massachusetts, says many workers have seen little, if any, increase in wages. Add on top of that a softening jobs market, and it's a problem for Republicans in November, he says.

``If the Fed slows things down, they're increasing that problem,'' Frank says.

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

Last Updated: July 17, 2006 00:18 EDT