Federal Reserve Vice Chairman Richard Clarida said the central bank should be ready to adjust monetary policy if headwinds to the economy from financial markets or global growth prove persistent, suggesting caution about moving ahead with interest-rate increases.
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. It would not want to wait too long to see overseas weakness affect the USA economy, he added. The principal worry is global growth, he said in questioning by David Rubenstein, the co-founder of private-equity firm Carlyle Group, where Powell was previously a partner. 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.
Powell's second appearance in less than a week generated a subdued response in financial markets, a sign he may have found his footing in how to describe central bank policy without surprising investors.
Powell's comments on Fed patience were similar to the message in the minutes of the Fed's December meeting as well as the comments of other Fed officials this week.
"We would have a less clear picture into the economy if it were to go on much longer", Powell said.
Asked what qualifies for "normal", Powell said "I don't know the exact level."He noted that the balance sheet has declined to about $4 trillion, but that before the 2008 crisis it was below $1 trillion". "That was conditional on a very strong outlook for 2019", which may or may not materialize, with the Fed adjusting policy accordingly.
The US central bank raised rates four times previous year in the face of robust economic growth and unemployment that touched its lowest level in half a century.
He agreed with the prevailing view of the USA economy slowing to around 2.25-2.5 per cent this year, with unemployment holding around the current 3.9 per cent.
The prospect of rising interest rates that could slow the economy spooked investors and contributed to the downturn in U.S. and global stock markets late past year. If conditions weaken, the Fed would react.
"I would expect them to repeat that the economy is strong", Scotiabank economist Derek Holt said.
The head of the Federal Reserve also warned that while his department has no official projection on the current government shutdown, it can still have a damaging effect on the national economy.