Fed Chief Warns Energy Prices A Danger

Federal Reserve Chairman Ben Bernanke told Congress Thursday that rising energy prices jeopardize a currently strong economy and left the door open to the possibility of another interest rate increase to keep inflation in check.

"Rising energy prices pose a risk to both economic activity and inflation," said Bernanke, who delivered his most extensive thoughts on the economy in several months. "To support continued healthy growth of the economy, vigilance in regard to inflation is essential."

At the same time, though, he raised the prospect of the Fed pausing its nearly 2-year-old rate raising 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 offered a mostly positive assessment of economic conditions in an 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.

Some analysts believe that will be the last increase for a while. Others, however, believe the Fed could push up its key rate to as high as 5.50 percent this summer before stopping. In either scenario, economists believe the Fed will end its rate-raising campaign this year.

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.

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.

"If energy prices stabilize this year, even at a high level, their adverse effects on both growth and inflation should diminish somewhat over time. However, as the world has little spare oil production capacity, periodic spikes in oil prices remain a possibility," Bernanke said.

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.