Fed's Quarles Plays Up Economy's Strengths as Markets See Risks

(Bloomberg) -- Federal Reserve Governor Randal Quarles expressed optimism about the state of the U.S. economy, calling strong hiring and low inflation a “good environment” even as investors focus on mounting threats to growth.

“Clearly markets are more attuned currently to the downside risks, but the core base case remains very strong,” Quarles, the central bank’s vice chairman for supervision, said at a conference in New York on Thursday. “The data on the real economy is very strong and continues to look strong.”

He also said there are signs emerging that global growth is slowing, but those may prove temporary.

“Some of the data that’s come out of China, some of the data that’s come out of Europe recently, would suggest maybe a little bit less growth in the near term,” he said, adding: “Certainly you can see a narrative where that recent data are results of transitory factors, and that we could get to the other side of that.”

Quarles’s optimism comes amid signs the U.S. economy is entering a soft patch. Economists from HSBC Holdings Plc and Deutsche Bank AG have cautioned that risks of a recession are rising in the U.S., as the combination of a prolonged trade war with China and partial government shutdown create headwinds to growth.

While Quarles didn’t give his outlook for monetary policy, Fed Chairman Jerome Powell and other central-bank leaders have stressed in recent weeks there’s no hurry to resume interest-rate increases in light of volatile financial markets, low inflation and a slowdown abroad.

Rate Hikes

The Fed raised rates in December for a ninth time in the past three years. The next meeting of the Federal Open Market Committee is scheduled for Jan. 29-30.

Addressing financial stability, Quarles said the Fed does see “some stretched valuations,” though those market issues have eased in the past month.

“The fundamental fact with respect to financial stability is that the financial sector is much more highly capitalized, there’s much more liquidity, than it had before the crisis,” he said. “And again, our assessment of the overall risks to stability in the current environment is moderate. It’s not really anywhere near the high end of the risk.”

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