US President Barack Obama knows he has his hands tied. Last night he lashed out at US lawmakers for refusing to extend unemployment benefits for the long-term unemployed.

About 2 million Americans are estimated to have had their unemployment benefits cut off in recent months. Republicans in the US Senate have opposed extending the benefit payments, without offsetting spending cuts. Without this action, they warn darkly, the country’s Budget deficit will continue to balloon, and the national debt will continue to climb.

Worryingly for Obama, the austerity message championed by the Republicans is striking a strong chord with US voters. Although the US Senate might finally approve an extension to unemployment benefits this week, Obama knows that the chances of boosting economic growth by launching a major government spending program are rapidly dwindling.

And that has to be a worry for an administration faced with a stubbornly high 9.5%  unemployment rate, and with consumer confidence and small business optimism quickly waning. There are also clear signs that the US housing sector remains under intense pressure. US banks are on track to repossess 1 million American homes this year — 10 times the 100,000 homes repossessed in a normal year.

Even worse, the Obama administration is watching on anxiously as clear deflationary pressures are emerging. US consumer prices have now fallen for the third consecutive month, and average hourly earnings are under pressure.

With the idea of fresh fiscal stimulus falling into distinct disfavour in Washington, there’ll be increased pressure on monetary policy to deliver the economic fix. And that why all eyes will be on US Federal Reserve boss Ben Bernanke when he delivers his semi-annual testimony to US lawmakers on Wednesday.

Bernanke faces a formidable challenge. He needs to reassure Americans that, should the US economic recovery falter, the Fed Reserve possesses the determination, and the means, to rekindle economic activity. He also needs to convince his audience that the central bank is committed to stamping out any deflationary impulses in the economy.

Bernanke is likely to be looking at several possible tools for achieving his goals. He might decide that to stop paying interest on deposits that banks lodged with the central bank, which will likely force banks to start lending out the money instead.

Alternatively, Bernanke may also decide to change the words the central bank uses in its communications to the market. At present, the US Fed routinely says that it expects interest rates to stay “exceptionally low” for an extended period. But this is a somewhat vague prescription, and some argue that the central bank would be more effective if it set itself a target. For instance, the central bank could promise to keep interest rates near zero until inflation reached a certain level.

Both of these measures essentially work on market psychology. The aim is to persuade investors and bankers to take more risks because the US central bank has signalled that it’s inclining towards even looser monetary policy.

A more direct approach would be for the Fed to again embark on an aggressive policy of quantitative easing, by buying up US Treasuries and mortgage-backed securities. This policy immediately injects a great deal more liquidity into US capital markets, and will likely drive down US yields even lower. But it is likely to be controversial. Critics argue that the policy undermines the long-term credibility of the US central bank, because the bank is effectively buying up the massive US government debt.

There are also questions as to the policy’s effectiveness. In the United Kingdom, the Swiss banking group, Credit Suisse, recently surveyed a group of market participants to determine which measures adopted by the UK authorities in the wake of the financial crisis were the most effective. The survey rated interest rate cuts as the most effective, followed by the decline in the exchange rate, and the measures introduced to bail out troubled firms in the financial sector. The benefits of the Bank of England’s £200 billion quantitative easing program and the government’s fiscal stimulus were judged less effective.

Credit Suisse analysts concluded that although quantitative easing likely had a favourable impact on the money supply and on bond yields, it was difficult to determine how effective the policy had been.

Which is likely to be scant comfort to US investors as they await the next clues as to Bernanke’s next move.