Bernanke testifies before Congress
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In his testimony before a Congressional committee Thursday, Federal Reserve Chairman Ben Bernanke said rising energy prices may hurt the U.S. economy.
updated 4/27/2006 1:05:02 PM ET 2006-04-27T17:05:02

Federal Reserve Chairman Ben Bernanke told Congress Thursday that while another interest rate increase may be needed to keep inflation in check, the central bank may soon relax its nearly 2-year credit-tightening campaign.

“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,” Bernanke said. “Of course, a decision to take no action at a particular meeting does not preclude actions at subsequent meetings,” he added.

Bernanke, the successor to longtime Chairman Alan Greenspan, offered a mostly positive assessment of economic conditions during a two-hour appearance before Congress’ Joint Economic Committee.

To fend off inflation, the Federal Reserve on March 28 boosted a key interest rate by one-quarter percentage point to 4.75 percent. It was the 15th increase of that size since the Fed embarked on a credit-tightening campaign in June 2004.

At that March meeting, the Fed hinted that another rate increase could be in the offing. It said “some further policy firming may be needed” to keep the economy and inflation on an even keel.

Bernanke on Thursday said that a spate of economic barometers that have come out since the March meeting suggesting the economy is carrying solid momentum “have not materially changed that assessment of the risks.”

Many economists are predicting the Fed will bump up rates by another quarter percentage point — to 5 percent — at the central bank’s next meeting on May 10.

“To support continued healthy growth of the economy, vigilance in regard to inflation is essential,” said Bernanke, who delivered his most extensive thoughts on the economy in several months.

After hearing Bernanke’s comments Thursday, analysts said the odds are growing that after the May meeting the Fed probably will take a break — perhaps temporarily — in its rate-raising campaign. Some analysts, however, believe the Fed will keep pushing up its key rate to around 5.50 this summer.

Although Bernanke held open the possibility of least one more rate increase on May 10, when the Fed next meets, he also attempted to keep his options open about future rate decisions.

The Fed chief stressed that interest rate decision could become less predictable, relying more heavily on incoming data about economic activity and inflation.

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“He is keeping his options open, but he also is suggesting that we may not see a straight-line path for interest rates. I think he is trying to knock down the notion that the Fed could come to a stop and that the story will end there,” said Lynn Reaser, chief economist at Bank of America’s Investment Strategies Group.

Rep. Carolyn Maloney, D-N.Y., and Sen. Paul Sarbanes, D-Md., raised concerns about interest rates moving much higher and suggested they would like to see the Fed end its rate raising campaign sooner, rather than later.

The economy has rebounded nicely from an end of year lull, Bernanke said.

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 registered 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 good, 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.

“Rising energy prices pose risks to both economic activity and inflation,” Bernanke said.

If energy prices stabilize this year — even at a high level — their adverse impact on economic growth and inflation should ebb over time, Bernanke said. But with oil supplies lean and demand high, “periodic spikes in oil prices remain a possibility,” he added.

Thus far, energy prices haven’t significantly fed into the prices of many other goods and services. But Bernanke made clear that the Fed will continue to closely watch “core” inflation — which excludes food and energy prices — for signs about where inflation is heading. Bernanke said that the future direction of the housing market is also something the Fed will watch closely. Housing barometers suggest that “this sector will most likely experience a gradual cooling rather than a sharp slowdown,” he said. That would bode for moderate slowdown in overall economic activity.

In terms of the economy’s long-term health, Bernanke repeated his interest in seeing the United States’ swollen budget and trade deficits curbed.

Addressing another matter, Bernanke urged China to do more to revamp its currency policy.

The United States’ trade gap with China was $202 billion last year, the highest deficit ever recorded with any country. U.S. manufacturers say China is keeping the value of its currency artificially low, giving it an unfair trade advantage.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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