Fed's Powell again stresses patience as USA economy's 'narrative' unfolds

GS financial conditions index

GS financial conditions index

Federal Reserve Chairman Jerome Powell said on Thursday the U.S. central bank has the ability to be patient on policy given inflation is stable, allowing it to assess whether the United States economy will slow this year as some in financial markets worry.

One of the principal goals of Powell's appearance was to continue to reassure markets that the Fed would not act rashly when raising rates and to communicate that the central bankers are closely monitoring the economy and markets.

While most previous shutdowns have been fairly short and have not affected the economy in the aggregate, Mr Powell said, "if we have an extended shutdown, I think that would show up in the data pretty clearly".

"The U.S. economy is solid", Mr. Powell said. "You should anticipate that we're going to be patient and watching, and waiting and seeing".

In his remarks before the Economic Club of Washington, Powell described the economy as strong at the end of a year ago, with the lowest unemployment levels in a half-century and solid gains in wages.

Asked what qualifies for "normal", Powell said "I don't know the exact level."He noted that the balance sheet has declined to about $4 trillion, but that before the 2008 crisis it was below $1 trillion".

Powell said that he had never met Trump before he was interviewed by the president in late 2017 for the Fed chairman's job. The latest forecasts issued in December suggested rates could rise by a median of two more times in 2019, but Powell said it was a mistake to construe that as any sort of official forecast or "plan".

Powell said last week that he's "listening sensitively to the message that markets are sending" about downside risks.

He also said that the Fed had no preset path for rate hikes and would be "patient" when determining whether to hike interest rates further in response to strong USA growth that risks sparking inflation, or to pause rate hikes to account for a global economic slowdown. Bloomberg's financial conditions index has retraced much of its December tightening.

The Fed chief was also asked about the partial USA government shutdown. Markets have expressed concerns that the Fed's operations to reduce the balance sheet could be depressing the markets and ultimately slow growth.

While he has near weekly meetings with Treasury Secretary Steven Mnuchin, Powell said he has not met with Trump since taking over as Fed chairman, nor does he have any meetings with the president scheduled.

Fed officials and many forecasters expect growth to slow in 2019, but to remain strong enough to continue generating jobs and keeping the unemployment rate near its nearly 50-year low.

Even so, USA central bankers face a challenging year that's complicating their communication.

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