Fed's Powell again stresses patience as U.S. economy's 'narrative' unfolds

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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.

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".

"The long-run fiscal, nonsustainability of the U.S. federal government isn't really something that plays into the medium term that is relevant for our policy decisions", Powell added.

Powell said last week that he's "listening sensitively to the message that markets are sending" about downside risks.

"We have the ability to be patient and watch patiently and carefully as we see the economy evolve and figure out which of these two narratives is going to be the story of 2019", Powell said. 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 US economy.

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.

Clarida is the latest US central banker to refine the Fed's monetary message after the hawkish tone of their December 19 statement and forecasts for further rate hikes in 2019 roiled financial markets. Bloomberg's financial conditions index has retraced much of its December tightening.

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"I don't see anything that suggests the possibility of a recession in the near term is at all elevated", he said. "The principal worry I would have is global growth".

The Fed chief was also asked about the partial US government shutdown. The Fed has projected two more rate hikes, but Powell is now signaling the Fed will be "patient" on any further hikes.

"It will be substantially smaller than it is now", Powell said.

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.

Since then, stock markets endured a topsy-turvy end to the year as the USA government shut down and global trade tensions ratcheted higher.

Recessions are typically caused by inflation rising quickly and forcing the Fed to respond with high interest rates or some sort of bubble in markets.

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