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Fed’s Powell briefly unsettles markets – again
WASHINGTON, Jan 11, 2019 (BSS/AFP) – Already-jittery US stock markets
temporarily shot lower on Thursday following another remark from Federal
Reserve Chairman Jerome Powell.
The central bank chief has been unusually outspoken in recent weeks with
comments that seemed to be geared at calming nervous investors but an offhand
comment at an event Thursday had the opposite effect.
On Wall Street, after five days of gains, the benchmark Dow Jones
Industrial Average briefly dropped more than 250 points from the day’s high
after Powell said the Fed’s large securities holdings should be
“substantially smaller” than the current level of just under $4 trillion.
Despite his largely upbeat view on the US economy, and clear signals the
Fed will be patient about raising interest rates any higher — statements
that helped equities to recovery — markets focused on those two words.
At the close, Wall Street finished up for the day but it does not take
much for investors to run for the exits, with markets already on edge amid
concerns the global economy is slowing just as interest rates are rising and
uncertainty about the US-China trade war.
Investors worry about that selling off the Fed’s securities will tend to
raise borrowing costs, even if the Fed’s benchmark lending rate is unchanged.
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.
The central bank “will not hesitate to make changes” to its balance sheet
policy should the economic picture shift, Clarida said.
Powell had roiled markets in early October when he indicated several more
rate increases were likely and since then he and other senior officials have
come out multiple times with more soothing comments.
The Fed chief on Thursday again stressed that policymakers could take time
to evaluate the economy before deciding on any additional rate moves.
Asked about the expectations for the Fed’s policy meeting later this
month, Powell said, “you should anticipate we are going to be patient and
watching and waiting and seeing.”
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Starting after the January 30 announcement, Powell will hold a press
conference after every meeting, rather than just four times a year, giving
him many more opportunities to try to communicate with financial markets.
He remains upbeat about the US economy, saying inflation is likely to hold
near the Fed’s two percent target, and does not see a risk of a US recession
anytime soon.
However, he acknowledged the concerns reflected in global stock markets
and said the Fed had “the ability to be patient and figure out which of these
two narratives is going to be the story of 2019.”
– Long shutdown hit –
He also warned the US economy could take a clear hit from the government
shutdown if it continued for a long time.
While most previous shutdowns have been fairly short and have not affected
the economy in the aggregate, Powell said, “if we have an extended shutdown,
I think that would show up in the data pretty clearly.”
The US government has been partially shuttered since late December as
President Donald Trump has refused to sign a budget agreement unless Congress
agrees to allocate more than $5 billion for a border wall.
About 800,000 federal workers, including air traffic controllers and
members of the Coast Guard, have been without pay for three weeks.
“In the short term if government shutdowns don’t last very long they’ve
typically not left much of a mark on the economy,” Powell said.
S&P Global Ratings estimated that the shutdown will trim 0.05 percent off
of US GDP each week.
Powell also worried about the lack of key economic statistics during the
government shutdown that the Fed uses to take the temperature of the economy,
such as retail sales and GDP growth.
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