By Nell Henderson
Washington Post Staff Writer
Friday, April 28, 2006
Federal Reserve Chairman Ben S. Bernanke told Congress yesterday that he and his central bank colleagues may pause in the process of raising interest rates 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 lift its benchmark short-term interest rate once more next month and then rest, after raising it steadily higher 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 anyway to collect more information, Bernanke said in his first testimony to Congress's 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 [Fed] 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," 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."
Bernanke did not say when the Fed might pause or when it might be done raising interest rates. But his remarks about taking a breather despite inflation risks caused chatter among some analysts and investors that the new Fed chairman might be soft on inflation.
"The Fed may pause . . . but I think that would be a mistake," said Richard Yamarone, director of research at Argus Research Co., a financial analysis firm. "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."
Others praised Bernanke for laying out his intentions while preserving his options. "He said, 'It probably makes sense for us to pause . . . but we should be prepared to tighten further,' " said former Fed board member Lawrence B. Lindsey, now a private consultant. "The press and the markets said they wanted transparency. Well, this is transparency. He told you exactly what he's going to do."
Bernanke's remarks 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.
Bernanke "had to meet two conflicting goals today," said Nicolas Checa, a managing director at Kissinger McLarty Associates, a global consulting firm. "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."
Bernanke did sound upbeat about the economy, saying, "It has been performing well, and the near-term prospects look good."
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 percent.
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 percent.
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 hike is their concern that housing might fall off more steeply than forecast, causing the economy to weaken more than expected.
"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," 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. Interest rates have been rising on credit cards, auto loans, adjustable-rate mortgages and home-equity lines of credit. Meanwhile, rates on long-term, fixed-rate mortgages, which are determined by global markets, have risen recently, as well, but remain low by historical standards.
Fed officials could leave their benchmark rate at 5 percent through the summer while they watch to see how the housing slowdown plays out.
But some Fed policymakers remain more worried about the risk of higher inflation than the risk of an economic slump and believe they may have to lift the benchmark rate above 5 percent.
If housing doesn't soften much and inflation moves higher, they could continue raising the rate through the summer to 5.5 percent or higher and pause later in the year.