Fed's Powell again stresses patience as U.S. economy's 'narrative' unfolds

Fed's Powell again stresses patience as U.S. economy's 'narrative' unfolds

The US economy could take a clear hit from the government shutdown if it continues for a long time, Federal Reserve Chairman Jerome Powell said on Thursday (Jan 10).

U.S. stocks initially turned lower after Powell said the central bank is sticking with its process of shrinking its balance sheet to a more normal level, which removes stimulus put into place to revive the economy following the financial crisis and recession a decade ago.

Powell was also asked about the Fed's plans to keep trimming its holdings of Treasury bonds and mortgage-backed securities, which it had purchased following the 2008 financial crisis as a way to keep long-term interest rates low and support an economy as it struggled to climb out of the worst recession since the 1930s.

Powell on Thursday also reiterated that, separate from what happens with interest rates, the Fed would continue allowing its almost US$4 trillion portfolio of bonds to shrink each month, to a level "substantially smaller" than it is now.

Speaking to an audience in Washington, D.C, Powell delivered the same reassuring message that bolstered markets last Friday.

His comments and remarks this week by other Fed officials have all suggested the central bank is prepared to pause its string of rate hikes at the beginning of this year to assess the impact of the Fed's credit tightening. He said the Fed's aim was to return the balance sheet to a "more normal level" but didn't specify what that level will be.

"We are very focused on our job", Powell said.

December figures for the Fed's preferred gauge of inflation - a separate measure related to consumption - are scheduled for release on January 31, though the report could be delayed because of the partial government shutdown. If global growth slows more, "I can assure you.we can flexibly and quickly move policy, and we can do so significantly if that's appropriate", he added. Rubenstein also hosts an interview show on Bloomberg Television. Fed chairs have met with presidents in the past, he added.

He agreed with the prevailing view of the United States economy slowing to around 2.25-2.5 per cent this year, with unemployment holding around the current 3.9 per cent.

Fed policy makers projected above-trend economic growth for this year in their December forecasts, and they expect the unemployment rate to fall further.

Powell also noted that it's a problem that the Commerce Department is mostly shuttered, which means key economic data such as retail sales and growth in gross domestic product won't be released later this month unless the government reopens. Financial markets are incorporating a variety of risks to the outlook, ranging from slowing global growth to the potential for a protracted trade war with China.

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