Bernanke Says Fed May Pause, Not Necessarily Stop, Rate Raises

WASHINGTON – Federal Reserve Chairman Ben Bernanke told Congress yesterday that he and his central bank colleagues may pause in the process of raising interest rates higher to restrain inflation, but that would not necessarily mean they were finished.Stocks rallied and the dollar’s value fell after financial market investors and analysts bet that the Fed is likely to rest after lifting its benchmark short-term rate at its next policymaking meeting May 10, after raising it steadily for nearly two years.The Fed remains concerned about the inflationary risks it sees in high energy prices and rapid economic growth, but it might stop raising rates for a while to collect more information, Mr. Bernanke said in his first testimony to the congressional Joint Economic Committee since succeeding Alan Greenspan as Fed chairman in February.“Even if in the [Fed]’s judgment the risks to its objectives are not entirely balanced, at some point in the future, the committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook,” Mr. Bernanke said.He added, however, that the Fed might resume raising interest rates after any pause: “A decision to take no action at a particular meeting does not preclude actions at subsequent meetings.”Mr. Bernanke’s comments may cause financial markets to worry that the new Fed chairman will be soft on inflation, some analysts said.“The Fed may pause … but I think that would be a mistake,” director of economic research at Argus Research Associates, Richard Yamarone, said. “With the economy advancing at such a torrid pace, the Fed can afford to err on the side of overdoing it. … The mistake would be to refrain from combating inflation pressures.”Mr. Bernanke’s remarks also came in a hearing at which both Republican and Democratic lawmakers urged the Fed to stop raising interest rates soon, and at a time when the Bush administration is reassuring disgruntled voters that the economy remains strong despite high gasoline prices.Mr. Bernanke “had to meet two conflicting goals today,” a managing director at global consulting firm Kissinger McLarty Associates, Nicolas Checa, said. “First, he had to signal confidence in the economy, especially at a time when the public feels gasoline prices are alarming. Second, he had to reassure markets that the Fed was a reliable guarantor of price stability after the recent disquieting, if inconclusive [inflation] data. Bernanke chose to emphasize the first message today. This is consistent with other efforts by the [Bush] administration to shore up confidence.”Mr. Bernanke did sound upbeat about the economy, saying, “It has been performing well and the near-term prospects look good.” Many analysts estimate the economy grew at about a 5% annual rate in the first three months of the year, a very robust pace.He also repeated that he believes at least one more Fed interest rate hike “may be needed,” a comment that reinforced widespread expectations that the central bank will lift its benchmark rate next month to 5%.That would be the 16th consecutive quarter-percentage point increase in the federal funds rate, the interest rate charged on overnight loans between banks, since June 2004, when it was 1%.Mr. Bernanke also said he expects the economy to slow in coming months, in part because the housing market “will most likely experience a gradual cooling rather than a sharp slowdown.”But one reason several Fed officials want to pause after the next rate increase is their concern that housing could fall-off more steeply than forecast, causing the economy to weaken more than expected. They are mindful that transcripts of the Fed’s meetings in 2000, released recently after the customary five-year lag, show policymakers then were slow to realize that the slowdown in business investment would be much more severe and protracted than they anticipated, causing the 2001 recession and initially sluggish recovery.“Significant uncertainty attends the outlook for housing, and the risk exists that a slowdown more pronounced than we currently expect could prove a drag on growth this year and next,” Mr. Bernanke told the committee.Higher interest rates restrain inflation by making it harder for consumers and businesses to borrow and spend, dampening demand and slowing price increases.

Bernanke Says Fed May Pause, Not Necessarily Stop, Rate Raises

Bernanke Says Fed May Pause, Not Necessarily Stop, Rate Raises

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