WASHINGTON – Keeping his options open, Federal Reserve Chairman Ben Bernanke signaled Thursday that after one more interest rate increase the central bank may take a break — perhaps only temporarily — from a rate-raising campaign aimed at keeping inflation at bay.
In his most extensive comments yet on the possible path of monetary policy, Bernanke also suggested that interest rate decisions could become less predictable than they have been as Fed policymakers rely more heavily on barometers of economic activity and inflation.
The Federal Reserve, which has raised rates 15 times at policy meetings over the past two years, "may decide to take no action at one or more meetings" in the future while waiting for economic information, Bernanke told Congress' Joint Economic Committee.
"Of course, a decision to take no action at a particular meeting does not preclude actions at subsequent meetings," he added.
Sen. Robert Bennett, R-Utah, called Bernanke's comments "very Greenspan-like .... sufficiently tipped in both directions." Still, the senator added that he viewed them as a signal that "we're getting to the point where this almost automatic increase is not going to occur."
Bernanke, who succeeded longtime chairman Alan Greenspan on Feb. 1, said the Fed will be paying especially close attention to whether rising energy costs feed into the prices of many other goods and services, and the extent to which a slowing housing market will crimp consumer spending and thus overall economic activity.
"We're much more data-driven," Bernanke said of the Fed. "We need to continually re-evaluate our forecasts and think about the prospects for the economy and make our decisions based on what the information is that's coming into our hands."
To fend off inflation, the Fed under Greenspan began raising rates in June 2004. Bernanke, in his first meeting March 27-28, ordered another rate increase. All told, rates have been bumped up a total of 15 times — with each move by one-quarter percentage point — over the last two years.
Many economists predict another quarter-point boost to 5 percent will come at the Fed's next meeting on May 10 — something Bernanke also signaled Thursday.
"Our assessment currently is that the risks to inflation are perhaps the more significant at the moment, and we need to address that," Bernanke said.
That May increase, though, could be the last one for a while, economists said.
"There's always the possibility that, if there's sufficient uncertainty that we may choose to pause simply to gain more information, to learn better what the true risks are and how the economy's actually evolving," Bernanke told lawmakers.
Economists said Bernanke was laying the ground work Thursday for a pause in the Fed's credit-tightening campaign, although opinions varied on when this would happen.
Given Bernanke's remarks, many analysts said the odds are now rising that the Fed will take a break at its June 28-29 meeting and leave rates alone. "One more rate hike in May then they will pause in June to see how the economy shakes out," predicted Mark Zandi, chief economist at Moody's Economy.com.
Others, however, believe rates probably will rise more before the Fed moves to the sidelines. Brian Bethune, economist at Global Insight, believes another rate increase at the June meeting is highly likely given the economy's strong momentum.
Either way, Sen. Paul Sarbanes (news, bio, voting record), D-Md., said it was good to know that "we're not on an irreversible treadmill here."
In a mostly positive assessment, Bernake said the economy rebounded nicely from an end-of-year lull.
Citing private forecasts, he said the economy grew at a rate of between 4 and 5 percent in the January-to-March quarter. That would mark a vast improvement from the anemic 1.7 percent growth rate in the final quarter of 2005. The government releases results of first-quarter growth surveys on Friday.
Growth will probably moderate in the coming quarters, but still remain healthy, Bernanke said.
But there are risks to this outlook, including energy prices, he said.
Oil prices zoomed to a record high of $75.17 a barrel last week. They have retreated a bit and are now hovering below $72 a barrel — still more expensive than a year ago. Gasoline prices have been marching up and are around $3 a gallon in some areas.
For now, Bernanke predicted a "slight slowing in growth" this year and next from high oil prices.
He also indicated that various tax and rebate ideas being considered in Congress wouldn't have much impact.
"Unfortunately there's nothing, really, that can be done that's going to affect energy prices or gasoline prices in the very short run," he said. "This is a situation that's been building up for a long time."