WASHINGTON -- Federal Reserve Chairman Ben S. Bernanke warned yesterday that rising oil prices threaten to drive up inflation even as they slow the economy, raising the specter of the worst of all economic worlds: stagflation.
Amid the uncertainty, he signaled that the Fed might be poised to end two years of steady interest rate increases as early as this spring.
"At some point in the future," Bernanke said in testimony before the congressional Joint Economic Committee, the Fed "may decide to take no action at one or more meetings."
"There's always the possibility that, if there's sufficient uncertainty, that we may choose to pause," he said, "simply to gain more information to learn better what the true risks are and how the economy is actually evolving."
The Fed's Open Market Committee next meets May 10 to consider interest rates. It has raised a key rate 15 times, to its present level of 4.75 percent, since it began a credit-tightening effort in June 2004.
Bernanke replaced Fed Chairman Alan Greenspan, who earned in his long tenure at the post a reputation for inscrutable remarks. Republican Sen. Robert F. Bennett of Utah said at yesterday's hearing that Bernanke's suggestion of a pause in interest rate increases were worthy of the great equivocator himself.
"That's a very Greenspan-like statement, sufficiently tipped in both directions," Bennett said. "But I take it as a signal that ... we're getting to the point where this almost automatic increase is not going to occur."
Chief among the risks at the moment, Bernanke said, are soaring prices for light sweet crude, which last week reached a record $75 a barrel and hovered just below $71 a barrel yesterday.
Monetary policymakers try to fine-tune interest rates in a way that keeps inflation down without stunting economic growth. High oil prices present a dilemma.
"On the one hand, they directly affect the cost of living, inflation," Bernanke said.
"On the other hand, by taking purchasing power away from consumers, they tend to slow economic activity," Bernanke said.
So far, he said, high oil prices are hurting consumers at the gas pump, but not in the broader marketplace.
There are few signs, Bernanke said, that oil price rises are being passed on to consumers in the prices they pay for goods and services, the so-called core inflation rate.
"If that were to happen, and if expectations of inflation were thereby to rise, that would be very deleterious to the long-term growth of the economy," Bernanke said.
"Rising oil prices and interest rates, coupled with a weakening housing sector, could take their toll on consumers and business alike and slow down the economy," said Sen. Jack Reed, a Democrat from Rhode Island.
The possibility that rising oil prices could accelerate inflation even as they put a crimp on economic growth has raised the possibility of what economists call stagflation - a combination of rising prices amid an economic slowdown.
"We have the potential for that," said Gary Thayer, vice president and chief economist for A.G. Edwards, the St. Louis-based investment firm.
"I think what the Fed has been trying to do is to tap on the brakes here and cool the economy off," Thayer said - something that could trim oil prices by softening demand. If oil prices continue skyward amid slowing growth, he said, "that could, indeed, lead to stagflation."
The U.S. economy grew at a 3.5 percent rate last year, but slowed in the fourth quarter to 1.7 percent.
Overall, Bernanke said, the economy is poised for a gradual cooling led by a softening of the housing market. Steady gains in home sales and prices in recent years have poured cash into homeowners' equity accounts, fueling consumer spending, which accounts for two-thirds of U.S. economic activity.
But home prices, Bernanke said, "appear to be in the process of decelerating, which will imply slower additions to household wealth and thereby less impetus to consumer spending."