Longer US government shutdown will hit economy, says Fed chief

Dwayne Harmon
January 12, 2019

While most previous shutdowns have been fairly short and have not affected the economy in the aggregate, Mr Powell said, "if we have an extended shutdown, I think that would show up in the data pretty clearly".

In an interview at the Economic Club of Washington, Powell echoed other Fed officials' comments and said inflation was low, and under control, and that the central bank could afford to be patient and flexible with its monetary policy going forward.

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.

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. He also said he would "be patient" as the central bank determines when to hike interest rates next.

Powell said last week that he's "listening sensitively to the message that markets are sending" about downside risks. He said he didn't know the exact level. While the central bank last month penciled in two interest-rate hikes in 2019 following four in 2018, officials are now signaling a potential pause through March or longer amid headwinds from trade, the US government's partial shutdown and global growth risks. Bloomberg's financial conditions index has retraced much of its December tightening.

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Powell said, for now, there is no evidence suggesting an elevated possibility of a recession.

The Fed chief was also asked about the partial US government shutdown. He added the Fed will have "a less clear picture" on the state of the national economy as during the shutdown the government agencies will not be able to release some vital data, including retail sales and GDP figures.

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

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.

That prospect has cheered markets, which had grown anxious that the Fed was not taking into account a variety of headwinds that could slow US growth this year.

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