Fed may be taking break from rate-raising campaign

WASHINGTON — The Federal Reserve is turning off the autopilot when it comes to raising interest rates.

An order for yet one more rate increase probably will come in May. But after that, the central bank may take a break — perhaps only temporarily — from a rate-raising campaign aimed at preventing inflation from taking off, the Federal Reserve chairman suggested on Thursday.

In his most extensive comments on the possible course of monetary policy, Ben Bernanke also said interest-rate decisions could become less predictable as Fed policy-makers rely more heavily on gauges of economic activity and inflation.

Over the past two years, the Fed steadily has raised rates 15 times — all but the last while Alan Greenspan was chairman.

The central bank now "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, keeping his options open.

Sen. Robert Bennett, R-Utah, said Bernanke's comments were "very Greenspan-like ... sufficiently tipped in both directions." Bennett said he viewed the remarks as a signal that "we're getting to the point where this almost-automatic increase is not going to occur."

Bernanke, who succeeded Greenspan on Feb. 1, said the Fed will pay 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 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."

Wall Street investors, cheered by Bernanke's words, sent stocks up. The Dow Jones industrials gained 28.02 points to close at 11,382.51.

To fend off inflation, the Fed under Greenspan began raising rates in June 2004. Bernanke, in his first meeting March 27-28, ordered a rate increase, too.

Each of the 15 rate increases has been by one-quarter of a percentage point.

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 believe rates probably will rise more before the Fed moves to the sidelines. Brian Bethune, economist at Global Insight, said a rate increase at the June meeting is likely in light of the economy's strong momentum.

But economist Richard Yamarone of Argus Research thought a pause would be a mistake. "Is Bernanke now going to wait to see the whites of the eyes of inflation before acting? I think that is going to be a problem," he said.

In a mostly positive assessment, Bernanke 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 percent and 5 percent from January through March. That would mark a vast improvement from the 1.7 percent growth rate in the final quarter of 2005. The government was releasing results of first-quarter growth surveys today.

Bernanke said growth probably will moderate in the coming quarters but will remain healthy. But there are risks to this outlook, including energy prices, he said.

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.