Nov. 9 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke failed to convince investors that there's no need for further interest-rate cuts soon.

Bernanke told lawmakers in Washington yesterday that officials already expect the economy to ``slow noticeably'' this quarter, and warned of ``upside risks'' to inflation. Futures traders focused on his growth comments, increasing the odds of a quarter-point cut in the benchmark rate on Dec. 11 to about 98 percent today, from 68 percent a week ago.

The speculation may complicate Fed decision making, raising the risk of a sell-off in stocks and bonds should officials keep the main rate at 4.5 percent. Bernanke and his colleagues may try to reinforce their message of a neutral stance on borrowing costs between now and their next meeting, economists said.

``Market participants don't think the Federal Reserve is facing reality,'' said Allen Sinai, president of Decision Economics Inc., a New York forecasting firm. ``We have a consumer that is facing a lot of headwinds. We have a business sector that is showing lower revenues, and we have a banking system that is showing a lot of cracks.''

Bernanke said in his remarks to the Joint Economic Committee of the U.S. Congress that he expects ``more reasonable'' growth by the American spring. He predicted the economy will pick up later in 2008 as the impact of the housing slump wanes.

Market Verdict

By contrast, stocks have slumped and Treasury notes climbed this month as investors anticipate growth will falter. The Standard & Poor's 500 Index has lost 6.2 percent since Oct. 31, when the Federal Open Market Committee cut its main rate a second time in six weeks. Yields on two-year Treasury notes climbed today, with their yields reaching the lowest since 2005.

Bernanke's outlook included slower growth and faster inflation for the ``short run.'' He rejected suggestions the U.S. is headed for the kind of sluggish growth and surging prices that characterized the economy three decades ago.

``We don't see anything approaching the period in the 1970s,'' he told legislators after being asked whether the U.S. is suffering from stagflation.

Central bankers and investors have competing views about how deeply the worst housing recession since 1991 and reduced access to credit will affect consumer spending, which makes up about two-thirds of the economy.

The Fed's in a bind because oil and energy costs are putting pressure on inflation even as the economy weakens, said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina.

`Another Day'

For investors, ``the short-term problem is growth expectations,'' said Silvia, a former economist at the Joint Economic Committee. ``Inflation is a problem for another day.''

Bernanke reiterated to the panel the FOMC's statement that after the Fed's easing, ``monetary policy roughly balanced the upside risks to inflation and the downside risks to growth.'' The 0.75 percentage point of cuts in six weeks was the most aggressive since the aftermath of the last recession.

The 53-year-old Fed chief added that the Fed is now ``very dependent'' on economic data to prompt any shift in its stance on interest rates.

After Citigroup Inc., Merrill Lynch & Co. and Morgan Stanley warned of potential losses of as much as a combined $23 billion on securities linked to mortgages, some analysts said the Fed's action to date isn't enough to safeguard the expansion.

`Behind the Curve'

``The Fed relinquished its pre-emptive role in October,'' said Christopher Low, chief economist at FTN Financial, New York. Future rate cuts will be ``behind the curve, not ahead of it. Ultimately, that means a higher risk of recession.''

Bernanke acknowledged yesterday that ``financial market volatility and strains have persisted'' and said officials are working with banks to establish ``true valuations'' for complex securities linked to subprime mortgages.

He reiterated the risk that house prices weaken more than anticipated, hurting spending. For each $1 that house prices fall there is a net effect on consumer spending of 4 to 9 cents, he said.

The Fed is ``probably stuck right now between possibly needing to ease some more to head off a recession, and possibly needing to tighten to head off inflation,'' said Robert McTeer, former president of the Federal Reserve Bank of Dallas. ``The net impact of that is going to be no change for a while.''

Inflation, Import Prices

The central bank's preferred inflation benchmark, the personal consumption expenditures price index, minus food and energy, rose 1.8 percent in September from a year before, the same as in August. Bernanke said before taking the Fed's helm his ``comfort zone'' for the measure was 1 percent to 2 percent.

Record high oil prices and the dollar's 8 percent decline against the currencies of major trading partners since January, according to Fed data, is underpinning inflation pressures. Import prices rose 1.8 percent in October, the most in 17 months. Excluding oil, import prices rose 0.5 percent.

Fed officials will now need to use the minutes of their Oct. 30-31 meeting, scheduled for release Nov. 20, and speeches to ``disabuse market participants'' that a December rate cut is all but certain, said Vincent Reinhart, a resident scholar at the American Enterprise Institute in Washington and former director of the Fed's monetary affairs division.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net.

Last Updated: November 9, 2007 17:31 EST