WASHINGTON – Few speeches will be followed as closely as the one to be delivered Friday by Federal Reserve Chairman Ben Bernanke, who is expected to outline what steps he might still take to help spark economic activity and stave off recession.

Bernanke will give his much-anticipated address at the annual Fed retreat in the Wyoming resort town of Jackson Hole, and financial markets may soar or plunge based on what he says.

The Fed chairman is in a bind. Most economic indicators point to a decelerating economy, so he must outline what tools he has left to prevent or reverse an outright contraction. The indicators don’t all point to recession, but they’re a mixed bag. Manufacturing indices are flashing recession signals, but retail sales and orders of durable goods – cars, refrigerators and other big-ticket items – are hardly in recession territory.

Hiring has picked up, albeit not anywhere near the pace needed to knock down the 9.1 percent unemployment rate.

And if the unlikely occurs and Bernanke announces big steps, he risks drawing the ire of prominent and vocal Republicans – including one who has gone as far as to suggest that the Fed’s previous efforts to fix the economy are treasonous. Texas Gov. Rick Perry, a Republican presidential candidate, refuses to back off his unsavory comments about the independent Fed chairman.

“He’s in a tough position,” said Vincent Reinhart, a former top economist on the Fed’s rate-setting Federal Open Market Committee and a former colleague of Bernanke’s. “A real froth has built up about this speech, probably much more so than he’d want.”

Reinhart, who is now a scholar at the free-market American Enterprise Institute, suspects that the Fed chairman may give markets less than hoped for because he might wait for the next scheduled FOMC meeting, on Sept. 20. One key factor in the speech and how it’s received is a piece of data coming that very morning: The Bureau of Economic Analysis will release its revision of growth estimates for the second quarter of this year. The bureau revised first-quarter growth on July 29 down to just 0.4 percent, and said second-quarter growth was a tepid 1.3 percent.

If the second-quarter number is revised to below 1 percent, it will be a clear signal that the economy is near, or perhaps already in, another recession.

In the Fed’s most recent statement on the economy, on Aug. 9, it made an unusual pledge to keep the benchmark federal funds rate near zero until the middle of 2013. And Fed governors, in a rare divided vote, committed to do even more if events warrant.

“The committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate,” the FOMC statement said.

Markets want to know what Bernanke still has in the toolbox.

“What they haven’t named at this point is the policy tools,” said Lance Roberts, the CEO and chief strategist for Streettalk Advisors in Houston.

Roberts and other analysts expect Bernanke to discuss a variety of options, including lowering the interest rate paid to banks for keeping reserves with the Fed and lengthening the maturity dates of the government bonds the Fed has purchased over the past several years. Both steps would drive down lending rates further in the economy and encourage financial risk-taking, which translates into economic activity.

“What’s important there is the order. How much weight does he put on the average maturity?” of bonds held by the Fed. Does he emphasize that or put more emphasis on the size of the balance sheet?” Reinhart said.

The Fed’s purchase of mortgage bonds and government bonds is called quantitative easing. The Fed has kept its benchmark interest rate near zero since December 2008, so its main policy tool to heat or cool the economy can do little more. Since the Fed can’t offer negative interest rates to essentially give money away, it must approximate that by other steps, such as the large-scale purchase of bonds.

The first two rounds of quantitative easing – dubbed QE1 and QE2 – were designed to drive down the interest rate on short-term government bonds, influencing short-term lending rates in the economy. It also allows the Treasury Department to pay off creditors with new, cheaper borrowing.

The steps have driven down borrowing costs for consumers and businesses – unfortunately as bank lending has tightened. They have also made it unattractive for banks and big institutional investors to seek the haven of government bonds. The low returns force them to take risks in stocks, corporate bonds and commodities in order to get returns that exceed the inflation rate.

If the economy clearly is going into recession, the Fed could offer QE3, a huge bond purchasing program that amounts to throwing the kitchen sink at the problem. This surely would be controversial, since the Fed announced last August that it would purchase $600 billion in government bonds, the so-called QE2 effort, which concluded in June.

Bernanke says that QE2 beat back deflation, or the fall in prices across the economy. His critics, however, think it artificially inflated stock prices and did more harm than good.

“What I want him to do is nothing,” said Walker Todd, a former official at the Federal Reserve banks of Cleveland and New York. “He has already done three or four times more than he should have done.”

Todd advocates raising the benchmark fed funds rate to at least 1 percent to support short-term credit markets and return a sense of normality.

“That won’t kill anybody, and it would give the Fed more policy tools,” he said.

Bernanke also can talk up the U.S. dollar to try to boost investor confidence, said David Malpass, a Fed critic and the president of the Wall Street research firm Encima Global.

“He has a bully pulpit, and in a sense he can talk about how to restore growth in the country. He could be more specific about the importance of tax reform, of the regulatory burdens,” said Malpass, who thinks the weak dollar has frightened off foreign investment in the United States.

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