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Longer US government shutdown will hit economy, says Fed chief
11 January 2019, 08:56 | Hattie Nash
US official warns of recession risk if interest rates go much higher
In that appearance Powell emphasized the Fed's flexibility and patience in evaluating data, easing expectations of steady rate hikes in a message amplified by a half dozen other Fed officials in recent days. "It's a tightly integrated economy and financial markets will see the effects of that", he said.
James Bullard, president of the St Louis Federal Reserve Bank, one of 12 in the Fed system and a voting member of the policy committee this year, called the current interest rate "a good level", in an interview with the Wall Street Journal. "The principal worry I would have is global growth".
USA 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.
US central bankers are refining their message after the hawkish tone of their December 19 statement and forecasts for further rate hikes in 2019 roiled financial markets.
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. The Fed has projected two more rate hikes, but Powell is now signaling the Fed will be "patient" on any further hikes.
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. "That was conditional on a very strong outlook for 2019", which may or may not materialize, with the Fed adjusting policy accordingly.
While there is wide agreement that the USA economy will grow more slowly than the roughly 3 per cent rate of 2018, there's a lot of debate about how fast the slowdown will be.
At the same time, Powell said there are concerns in financial markets about slowing global growth and rising trade tensions. If conditions weaken, the Fed would react.
The Fed chief was also asked about the partial U.S. government shutdown.
"Notwithstanding strong economic growth and a low unemployment rate, inflation has surprised to the downside recently, and it is not yet clear that inflation has moved back to 2 percent on a sustainable basis, " Clarida said.
"We're in a place where we can be patient and flexible and wait and see what does evolve, and I think for the meantime we're waiting and watching", Powell said in a question-and-answer session Thursday at the Economic Club of Washington, D.C.
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