Bernanke: Rate rise pause possible

By Tim Ahmann

WASHINGTON (Reuters) – Federal Reserve Chairman Ben
Bernanke on Thursday said U.S. interest-rate rises will be
increasingly driven by economic data and policy-makers could at
some point pause in their 22-month credit-tightening campaign
to assess the outlook.

“Future policy actions will be increasingly dependent on
the evolution of the economic outlook, as reflected in incoming
data,” Bernanke said in prepared testimony to the congressional
Joint Economic Committee.

He said it seemed “reasonable” to expect U.S. economic
growth to moderate toward a more sustainable pace as the year
progresses, but the Fed’s policy-making committee must still
remain vigilant on inflation.

“Even if in the committee’s judgment the risks to its
objectives are not entirely balanced, 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,” he said.

The Fed chief said any decision to take a break in the
Fed’s interest-rate rising campaign would not preclude action
at subsequent meetings.

Stocks rose and the dollar fell on the suggestion a pause
in rate rises was possible. Futures traders have fully priced a
25-basis-point rate increase at the Fed May meeting but chances
the Fed will hike rates again in June fell as low as 44 percent
from as high as 72 percent earlier.

Bernanke also addressed the longer-term economic challenges
of getting the U.S. budget on a more sustainable path and
tackling the large and growing shortfall in U.S. trade with the
rest of the world.

The former White House economic adviser said that so far,
the United States had had “little difficulty” in attracting the
foreign capital needed to cover the U.S. current account trade
gap. But he said the investment and trade deficit could not
continue to widen forever.

“While it is likely that current account imbalances will be
resolved gradually over time, there is a small risk of a sudden
shift in sentiment that could lead to disruptive changes in the
value of the dollar and in other asset prices,” he said.

Bernanke told the panel the outlook for inflation was
“reasonably favorable,” with core price measures having
remained roughly stable over the past year and with long-term
inflation expectations well-anchored.

However, he said energy prices remained a concern.

“If energy prices stabilize this year, even at a high
level, their adverse effects on both growth and inflation
should diminish somewhat over time,” Bernanke said.

“However, as the world has little spare oil production
capacity, periodic spikes in oil prices remain a possibility.”

In discussing the Fed’s expectation for a more moderate
pace of growth, Bernanke took note of what he called “signs of
softening” in the U.S. housing market.

“The available data … suggest that this sector will most
likely experience a gradual cooling rather than a sharp
slowdown,” he said. “However, significant uncertainty attends
the outlook for housing and the risk exists that a slowdown
more pronounced than we currently expect could prove a drag on
growth this year and next.”