Top Fed Officials Pledge Patience, Willingness to Act If Needed

(Bloomberg) -- Federal Reserve policy makers from Chairman Jerome Powell on down hammered home the message that the central bank will be especially cautious about pushing ahead with interest-rate increases after raising them four times last year.

“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 at the Economic Club of Washington, D.C.

His deputy, Richard Clarida, echoed those remarks and also said that headwinds to the U.S. economy should be offset by policy if they prove sustained.

Their comments, at separate events on Thursday, reinforce a message that the Fed will hold rates steady while assessing the impact of slower global growth and tighter financial conditions on the economy.

Clarida, who spoke before the Money Marketeers of New York University, said moderating global growth and tighter financial conditions represent “crosswinds” to the economy.

“If these crosswinds are sustained, appropriate forward-looking monetary policy should respond to keep the economy as close as possible to our dual-mandate objectives of maximum employment and price stability,” he said.

U.S. 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. They later rallied, with the S&P 500 Index closing about 0.5 percent higher. Treasury yields advanced with the dollar.

The balance sheet “will be substantially smaller than it is now,” though bigger than it was before the crisis, Powell said. He said he didn’t know the exact level. Critics of the Fed say that its approach to gradually shrinking the balance sheet is contributing the turbulence in financial markets.

Balance Sheet

Clarida later said that while the Fed was still reviewing how big the balance sheet should be in the longer run, any decision on its size will be consistent with the Fed’s goals for maximum employment and price stability.

“If we find that the ongoing program of balance sheet normalization or any other aspect of normalization no longer promotes the achievement of our dual-mandate goals, we will not hesitate to make changes,” he said, echoing similar remarks by Powell on Jan. 4.

U.S. central bankers are refining their message after the hawkish tone of their Dec. 19 statement and forecasts for further rate hikes in 2019 roiled financial markets. The Fed’s communications -- and a Bloomberg News report that President Donald Trump had discussed firing Powell -- helping bring on the worst December for stocks since the Great Depression.

Since the meeting, Fed officials have indicated they’re less inclined to keep raising than their statement and projections for two hikes in 2019 had suggested.

Powell said last week that he’s “listening sensitively to the message that markets are sending” about downside risks. Minutes of the December meeting released on Wednesday showed that many officials felt the central bank “could afford to be patient about further policy firming,” indicating the Fed could place interest rates on hold through March or longer as it waits for clarity on risks to global growth that could affect the U.S. economy.

The more flexible approach, apparent in the minutes and in recent speeches, has supported stock prices. Bloomberg’s financial conditions index has retraced much of its December tightening.

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On Thursday, Powell said he hasn’t seen anything to indicate that the risk of a recession is elevated. The partial government shutdown is unlikely to leave a mark on the economy in the short term, though the Fed will have a less clear picture of growth without data from the Commerce Department, which releases figures including retail sales and gross domestic product.

At the same time, Powell acknowledged that financial markets are expressing concern about risks. The principal worry is global growth, he said.

Fed policy makers projected above-trend economic growth for this year in their December forecasts, and they expect the unemployment rate to fall further. Those forecasts appear supported by a robust December labor-market report.

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