Bernanke Says Fed May Give Rate Hikes a Rest

Federal Reserve Chairman Ben S. Bernanke suggested Thursday that although the central bank had not ended its campaign to raise interest rates, it might pause soon and wait for more economic data.

For now, he said, rising energy prices and other inflation pose a greater economic risk than slowing growth, and higher rates are necessary to combat them. But that soon may no longer be the case.

“At some point in the future, the [Fed’s policymaking] 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,” Bernanke told Congress’ Joint Economic Committee.

The prospect of a rate-hiking pause cheered stock and bond investors who fear that higher rates will erode economic growth and corporate profits. Major stock indexes rallied, while bond yields fell.

The Federal Open Market Committee, which meets eight times a year, has raised the rate on overnight loans between banks at 15 consecutive meetings since June 2004, from 1% to 4.75%. Economists generally agree a quarter-point hike is in store at the next meeting May 10.

But Bernanke’s statement Thursday threw some doubts into expectations for another increase June 29.

“Reading between the lines, I’d say he intimated he was inclined to take a break in June,” said Robert DiClemente, Citigroup Inc.’s chief U.S. economist.

Bernanke said the economy appeared to have grown unsustainably fast in the beginning of 2006. He predicted that a report today by the Commerce Department would show that the economy grew at an annual rate of 4% to 5% in the first three months of the year -- much higher than the 3% historical average and the 1.7% growth of last year’s final quarter.

But, Bernanke added, “it seems reasonable to expect that economic growth will moderate toward a more sustainable pace as the year progresses.”

For all of 2006, he foresaw “growth in the range between 3% and 4% -- a very healthy pace of growth. And I believe that would be consistent with our attempts to keep inflation well anchored.”

Notably, Bernanke said, there were signs of softening in the recently red-hot housing market. House prices were not falling, he said, but they were rising at a declining rate. The effect would spill into consumer spending, he said, because consumers have borrowed against the value of their homes to maintain spending on other items.

DiClemente said Bernanke seemed to be laying a foundation for satisfying both the inflation hawks, who favor higher interest rates, and the advocates of economic growth, who fear that the Fed’s rate-raising campaign may overshoot the mark.

On another issue, Bernanke urged Congress in no uncertain terms to come to grips with the record federal budget deficit. Although he did not prescribe either tax increases or spending cuts, he did say the need for action was urgent.

“The sooner we make these hard choices, the better the economy will be able to adjust to whatever changes we make,” he said.

Several committee members tried, to no avail, to get Bernanke to endorse the view that tax cuts generate enough economic activity that lower tax rates produce as much government revenue as higher rates.

“I don’t think as a general rule that tax cuts pay for themselves,” he said.

“What I’ve argued instead is that, to the extent that tax cuts produce greater efficiency or greater growth, they will partially offset the losses in revenues.”

Under questioning, Bernanke ventured into matters not immediately in the Fed’s jurisdiction.

Asked about the high price of oil, he said there was nothing that policymakers could do in the short term to bring it down. Rising prices stemmed from growing global demand at a time of insecure supply.

A windfall profits tax on oil companies, much discussed in Congress, would do nothing to increase the supply of oil, Bernanke said. He said he would prefer to let markets work, with high prices encouraging more production and conservation.

Bernanke also said he was alarmed by increasing economic inequality in the United States. Wages of hourly workers, he said, have not even kept up with inflation despite the fact that workers’ productivity -- their output per hour -- has grown sharply.