Published: Fri, January 11, 2019
Economy | By

Longer US government shutdown will hit economy, says Fed chief

Longer US government shutdown will hit economy, says Fed chief

"Chairman Powell chose to make no news at his latest interview".

"I don't see a recession", Powell said. They later rallied, with the S&P 500 Index closing about 0.5 per cent higher.

Stocks turned negative after the comments, with the Dow recently down about 35 points.

As inflation shows no signs of accelerating much beyond the Fed's two per cent target, there is no urgent need to raise the benchmark lending rate further, he said.

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.

Powell and others have been less demonstrative and noted that economic data remains strong, particularly after a recent payroll report that showed more than 300,000 jobs added in December.

"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. "The U.S. economy is solid".

Still, Powell's comments and those of other officials "are developing a new narrative".

Part of that message is meant to downplay the significance of the policy projections that officials issue every three months. The Fed has projected two more rate hikes, but Powell is now signaling the Fed will be "patient" on any further hikes.

The balance sheet "will be substantially smaller than it is now", though bigger than it was before the crisis, Powell said. "That was conditional on a very strong outlook for 2019", which may or may not materialize, with the Fed adjusting policy accordingly.

The US central bank raised rates four times past 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 United States economy slowing to around 2.25-2.5 per cent this year, with unemployment holding around the current 3.9 per cent.

Many business leaders remain optimistic about the United States economy this year, despite higher interest rates and large swings in the stock market. If conditions weaken, the Fed would react.

In a speech Wednesday, Charles Evans, president of the Fed's Chicago regional bank, said that modest inflation allowed the Fed to "wait and carefully take stock of the incoming data and other developments" before deciding on future rate hikes.

He also anxious about the lack of key economic statistics during the government shutdown that the Fed uses to take the temperature of the economy.

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