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

11 January 2019

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).

In remarks at an appearance in Little Rock, Arkansas, on Thursday, St. Louis Fed President James Bullard was blunt, saying that the central bank had reached the "end of the road" in its current rate increase cycle.

After four rate hikes past year, the Fed would be "bordering on going too far and possibly tipping the economy into recession" if rates go higher, Bullard said, adding that he would be willing to cut interest rates if needed.

Powell said that he had never met Trump before he was interviewed by the president in late 2017 for the Fed chairman's job. Powell and several other Fed officials have recently begun stressing the idea that the Fed can afford to be "patient" when it comes to raising rates because inflation is so low.

The monthly reductions, effectively running on autopilot, have been criticized by some as a steady tightening of financial conditions the Fed should reconsider. Big picture: "they don't have that much further to go and they don't have to go there fast", said Robert Tipp, chief investment strategist with PGIM Fixed Income in Newark, New Jersey.

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. Traders were already wary of statements Powell made in December about rate hikes.

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". "That was conditional on a very strong outlook for 2019, an outlook that may still happen".

The prospect of rising interest rates that could slow the economy spooked investors and contributed to the downturn in USA and global stock markets late previous year.

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

"There is no pre-set path for rates. particularly now", he said.

"I would expect them to repeat that the economy is strong", Scotiabank economist Derek Holt said.

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.

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