The Fed May Stand Back and Watch the Numbers for a While

The chairman of the Federal Reserve, Ben S. Bernanke, indicated on Thursday that the central bank was ready for a cautious experiment.
By: EDMUND L. ANDREWS: The New York Times
Despite unexpectedly strong economic growth in recent months, and some evidence of a risk of higher inflation, Mr. Bernanke told Congress that the Fed's policy-making committee might pause temporarily in its two-year campaign to raise interest rates.

"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," Mr. Bernanke told members of the Joint Economic Committee.

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

Mr. Bernanke's comment, which he repeated in the same hearing, signaled that the Federal Reserve might stop its rate increases after one more adjustment at its meeting on May 10.

But it also raised the possibility of a "stop and go" approach that would differ significantly from the Fed's typical pattern over the last two decades. Mr. Bernanke suggested that the Fed's actions from now on would be governed by the signals it receives from economic data.

Investors quickly reduced their bets that the central bank might raise interest rates at its late June meeting. Based on prices of federal funds futures, investors reduced the odds of a second rate increase in June by about half, to 30 percent.

At its policy meetings, which are usually held approximately every six weeks, the Federal Reserve has raised the overnight federal funds rate 15 consecutive times in the last two years, to 4.75 percent from 1 percent, and it is all but certain to raise it to 5 percent at its May meeting.

Fed officials made it clear earlier this month that they were near the end of their march toward higher rates. But a pause would let policy makers see if their efforts are having the impact they expected.

"It is quite sensible for them to sit back and see where they are," said Paul Ashworth, senior international economist at Capital Economics, a consulting firm in London.

"The rule of thumb is that effects of rate increases take about 12 to 18 months to come through in the pipeline," Mr. Ashworth said. "One of the things the Fed wants to do is make sure the cumulative impact of past tightening has had the effect it was supposed to have."

The uncertainty is whether moves so far by the Fed will cool the economy enough to keep inflation under control. With unemployment in March at 4.7 percent, the nation is still adding about 200,000 jobs a month — a fairly robust pace.

Mr. Bernanke's game plan assumes that growth will slow from about 5 percent in the quarter that just ended to an annual rate of about 3 percent in the months ahead, which would be enough to keep unemployment low while easing inflation fears.

On Thursday, Mr. Bernanke acknowledged that the economy might have expanded at an unexpectedly rapid pace of nearly 5 percent in the first three months.

But, he added, "it seems reasonable to expect that economic growth will moderate to a more sustainable pace as the year progresses."

Despite an increase in home sales last month, Mr. Bernanke said the housing market and housing prices would "most likely experience a gradual cooling" that would slow the rise in household wealth and consumer spending.

Mr. Bernanke predicted that high energy prices would slow the economy slightly as well, though he expressed more concern that those energy costs would lead to higher prices for other goods and services.

Laurence H. Meyer, senior forecaster at Macroeconomic Advisers, said Mr. Bernanke's comments on Thursday "helped clarify" the Fed's plans and predicted that it would pause after raising rates to 5 percent next month.

By many measures, the federal funds rate is in line with what economists say they believe is a neutral rate that neither provokes inflation nor slows the economy. The Fed's preferred measure of inflation, excluding prices of food and energy, remains about 2 percent a year — just at the top end of what policy makers view as their comfort zone.

If the Fed pushes overnight interest rates to 5 percent next month, it would be nearly three percentage points above the core rate of inflation. That would be in line with historical patterns, and a major reversal from two years ago, when the Fed's benchmark was well below the rate of inflation.

According to minutes from the Fed's policy meeting in March, most policy makers thought they were near the end of raising rates and several "expressed concern about the dangers of tightening too much."