Federal Reserve Chairman Ben Bernanke on Thursday said for the first time the central bank could at some point pause its 22-month interest-rate rising campaign to allow time to divine the economy's path.
Bernanke told Congress the economy was poised to slow but the Fed's policy panel may opt for a hiatus even if inflation risks were elevated, leading financial markets to cut bets on a June rate rise while still wagering on one in May.
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, Bernanke said in testimony before the Joint Economic Committee.
Of course, a decision to take no action at a particular meeting does not preclude actions at subsequent meetings, he added, signaling a pause may not spell the end of rate rises.
The Fed bumped benchmark overnight rates up by a quarter-percentage point to 4.75 percent on March 28 -- the 15th consecutive rise -- and is expected to lift rates again on May 10. However, Thursday's testimony led traders to scale back bets of a subsequent rate rise in June.
The talk of a pause gave a lift to bond prices and offered stocks a short-lived boost, while the dollar fell. Traders in futures markets cuts the odds of a June rate rise to around 30 percent from as high as 72 percent earlier on Thursday.
Analysts said the Fed chief's remarks suggested a desire to ensure the Fed does not go too far with monetary tightening, given the time lag for shifts in credit costs aimed at slowing or speeding growth to work their way through the economy.
The overall tone is the Fed's crystal ball is not as clear as they would like it to be, said Glenn Haberbush, an economist at Mizuho Securities USA Inc. in New York.
Bernanke also addressed the longer-term economic challenges of putting 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 adviser said that so far, the United States had had little difficulty attracting the foreign capital needed to cover the deficit in the U.S. current account, a broad trade measure that includes investment flows.
But he said it could not 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 prices roughly stable over the past year and with long-term inflation expectations well-anchored.
However, he said energy costs remained a concern. U.S. crude oil futures eased to $71.25 a barrel on Thursday after a record-toppling run that saw prices soar past $75 on Friday.
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 after a five-year boom.
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.
(Additional reporting by Glenn Somerville)