Published: Sun, January 13, 2019
Markets | By Erika Turner

Fed chair Jerome Powell says he's anxious about rising USA debt

Fed chair Jerome Powell says he's anxious about rising USA debt

"These recent developments...represent crosswinds to the USA economy".

Federal Reserve Chairman Jerome Powell on Thursday stressed again that the USA central bank can be patient in approving any further rate increases as officials gauge whether the US economy will slow this year, as some in financial markets worry, or continue motoring ahead as the Fed itself expects.

However, Fed had lowered the growth forecast of the USA economy to 2.3 percent during the latest rate hike in December.

Many business leaders remain optimistic about the United States economy this year, despite higher interest rates and large swings in the stock market.

Larry Summers, a Harvard professor and former Treasury Secretary under former President Bill Clinton, said earlier this week that he thinks there's "better than a 50-50 chance" of a recession in 2020.

The balance sheet "will be substantially smaller than it is now", though bigger than it was before the crisis, Powell said.

"The word "patient" is used often when the Fed's policy direction is still tightening but its next rate hike can wait for a considerable time".

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During an interview at The Economic Club of Washington, D.C., Powell said that continued shutdown stopped some of the data feed that the Fed needed, making the outlook of USA economy less clear, thus complicating policy-making.

The central bank's quarterly forecast in December showed Fed officials still expect two more increases in 2019.

U.S. Treasury Secretary Steven Mnuchin said late on Thursday that Chinese Vice Premier Liu He will "most likely" visit Washington later in January for trade talks.

However, in prepared remarks released later Thursday in New York, Fed Vice Chairman Richard Clarida reiterated the central bank's reassurance that if needed it could stop or slow the drawdown of its securities holdings.

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. However, many economists believe the Fed may end up raising rates only once in 2019, and that solo rate hike may not occur until the middle of the year. Some policymakers said the Fed could also slow the pace of decline in reserves as it approaches the desired longer-run level. Markets have expressed concerns that the Fed's operations to reduce the balance sheet could be depressing the markets and ultimately slow growth.

The three officials agreed the Fed should heed the message from markets.

"Notwithstanding strong economic growth and a low unemployment rate, inflation has surprised to the downside recently, and it is not yet clear that inflation has moved back to 2 per cent on a sustainable basis, " Clarida said.

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