Longer US government shutdown will hit economy, says Fed chief

GS financial conditions index

The speech reinforces comments by other policy makers this month that the Fed is likely to keep interest rates on hold through at least March following four hikes in 2018.

Powell said that he had never met Trump before he was interviewed by the president in late 2017 for the Fed chairman's job.

"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.

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.

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

"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, " Clarida said. Stocks, which closed in the green Thursday, briefly dipped into the red after Powell pointed to more monetary tightening ahead, including continuing to shrink the Fed's $4 trillion balance sheet. The latest forecasts issued in December suggested rates could rise by a median of two more times in 2019, but Powell said it was a mistake to construe that as any sort of official forecast or "plan".

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

While there is wide agreement that the U.S. 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.

"Financial markets are expressing a view of concern about downside risks associated with global growth and with trade", Powell said.

"There is no pre-set path for rates. particularly now", he said. If global growth slows more, "I can assure you. we can flexibly and quickly move policy, and we can do so significantly if that's appropriate", he added.

The Fed chair, who has been publicly criticised repeatedly by President Donald Trump in recent months, warned that if there is an "extended shutdown", it would have an impact on the economy that "would show up in the data very clearly".

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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