Longer US government shutdown will hit economy, says Fed chief

Powell on Watch

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.

"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.

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

"In the short term if government shutdowns don't last very long they've typically not left much of a mark on the economy", Mr Powell said. There is good momentum going into this year. 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.

"It'll be substantially smaller than it is now.but nowhere near where it was before", Powell said of the balance sheet, which began shrinking in October 2017.

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

While most previous shutdowns have been fairly short and have not affected the economy in the aggregate, Mr Powell said, "if we have an extended shutdown, I think that would show up in the data pretty clearly".

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Powell also noted that it's a problem that the Commerce Department is mostly shuttered, which means key economic data such as retail sales and growth in gross domestic product won't be released later this month unless the government reopens.

While he has near weekly meetings with Treasury Secretary Steven Mnuchin, Powell said he has not met with Trump since taking over as Fed chairman, nor does he have any meetings with the president scheduled.

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

"We're in a place where we can be patient and flexible", he said.

Asked if the Fed still plans two rate hikes, Powell emphasized there is not on a set course. "We're waiting and watching".

"The long-run fiscal, nonsustainability of the United States federal government isn't really something that plays into the medium term that is relevant for our policy decisions", Powell added. The Fed chief will be in focus again this afternoon as he fields questions at the Economic Club of Washington.

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