Three weeks after one of the less successful Federal Reserve decisions of recent times, Mr Alan Greenspan has some difficult explaining to do today.

The Fed chairman makes his twice-yearly appearance before a congressional committee amid some bafflement in the financial markets about what he really thinks.

The Central Bank not only cut interest rates by just a quarter-point in June, when the market was halfway to pricing in a half-point cut, but also seemed - without a great deal of evidence - remarkably sanguine about the economic recovery.

Its decision - and an ambiguous and anodyne statement released with it - helped spark a big rise in bond yields, undoing much of the fall in long-term interest rates that had loosened monetary conditions earlier in the year and provided a supportive environment to growth.

Yields had been held down by a widespread belief that the Fed was committing to holding interest rates low into the future and was prepared to use more radical measures, such as buying bonds outright, if necessary.

The outcome of the June meeting was widely accepted - even within the Fed - as one of its less successful episodes. But although the post mortem seems to have produced some feelings of "mea culpa", Fed officials also cling to a defiant insistence that it was the markets that got it wrong.

Egged on by unhelpful press speculation about half-point interest rate cuts, they say, investors over-interpreted what the Central Bank was saying and wrongly assumed there was a big groundswell of support on the Fed's open market committee for a half-point cut and an explicit commitment to hold rates down.

There is some support for this view from unexpected quarters in Congress. Mr Barney Frank, senior Democrat on the House of Representatives committee that will hear Mr Greenspan's testimony today, has often criticised Fed strategy. But he has little sympathy for bond investors bemoaning their losses.

"It is not as if the Fed has a clear plan which they are deliberately obfuscating," he says.

"It is entirely appropriate for them to be unsure what to do right now."

Mr Frank may, however, be ascribing more ignorance to the Fed than it is prepared to admit itself in public.

With business leaders still apparently less than totally convinced that demand is strong enough to induce them to resume investing, Mr Greenspan will want to avoid adding to their doubts.

Instead, his report to Congress, which includes various forecasts from inside the Fed system, will most likely contain a robust prediction that the economy will accelerate in the second half of the year.

And by continuing to warn that inflation may not rise for some time, he may at least help to restrain bond yields from rising further by diminishing the chance of rate hikes.

The Fed's confidence that the economic recovery is about to gather steam is based more on what ought to happen given the huge amounts of monetary and fiscal stimulus in the economy, rather than what they have actually seen so far.

In one of the more unfortunate developments for the Fed's credibility, its assertion in the June statement that "recent signs point to . . . labour and product markets that are stabilising" was followed by a sharp jump in the unemployment rate in June and continued rises in new claims for unemployment benefits.

There is still some belief among investors that the Fed will not reduce rates below 0.75 per cent because it will hit the money market fund industry which depends on a positive short-term interest rate to make a profit.

This belief seems overdone, and Mr Greenspan could possibly push down interest rate expectations by making clear the floor is lower than investors think. - (Financial Times Service)