Powell: Fed can be patient as USA economy evolves in 2019

Mae Love
January 11, 2019

Investors will be looking for new clues on USA interest rate policy when Federal Reserve Chairman Jerome Powell speaks before the Economic Club of Washington on Thursday afternoon.

Powell said that he had never met Trump before he was interviewed by the president in late 2017 for the Fed chairman's job. Several of his recent appearances have generated large market swings in both directions.

"We have the ability to be patient and watch patiently and carefully as we see the economy evolve and figure out which of these two narratives is going to be the story of 2019", Powell said.

US 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.

Thursday's brief drop stood in contrast to the response to Powell's remarks last Friday, when the Dow surged 747 points after Powell said the Fed is willing to be "patient" and "flexible" about future interest rate hikes - sentiments he reiterated Thursday.

Asked if the Fed still plans two rate hikes, Powell emphasized there is not on a set course.

"Growth prospects in other economies around the world have moderated somewhat in recent months, and overall financial conditions have tightened materially, " he said in the text of a speech late Thursday in NY. It would not want to wait too long to see overseas weakness affect the USA economy, he added.

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Powell's comments on Fed patience were similar to the message in the minutes of the Fed's December meeting as well as the comments of other Fed officials this week.

"We would have a less clear picture into the economy if it were to go on much longer", Powell said.

Part of that message is meant to downplay the significance of the policy projections that officials issue every three months. Traders were already wary of statements Powell made in December about rate hikes. "That was conditional on a very strong outlook for 2019, an outlook that may still happen".

The U.S. central bank raised rates four times previous year in the face of robust economic growth and unemployment that touched its lowest level in half a century.

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

"Financial markets are expressing a view of concern about downside risks associated with global growth and with trade", Powell said. If conditions weaken, the Fed would react. "The principal worry we have is global growth" in Asia, Europe and elsewhere.

JPMorgan Chase has estimated that the partial government shutdown - which is 20 days old Thursday - is shaving $US1.5 billion off the economy each week, a modest amount in the context of a $US20 trillion economy, the damage will keep growing.

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