MNI POLICY: Fed's Powell: Patience Warranted on Policy Change

By Jean Yung and Kevin Kastner

     WASHINGTON (MNI) - The Federal Reserve will be "patient" in making its next

policy move amid "muted" inflation and a raft of downside risks including slower

global growth, tighter financial conditions and ongoing trade uncertainty,

Federal Reserve Chairman Jay Powell told the Senate Banking Committee on

Tuesday. He added that the U.S. economic outlook remains favorable despite these

crosscurrents and conflicting signals. 

     The FOMC is also prepared to adjust its balance sheet normalization program

in light of economic and financial developments, and officials are currently

evaluating the appropriate time and method by which to end runoffs, Powell

added. 

     "With inflation pressures muted, the FOMC determined that the cumulative

effects of these developments, along with ongoing government policy uncertainty,

warranted taking a patient approach with regard to future policy changes," he

said in his opening remarks. 

     Here are the other key points in his testimony:

     -Having shaved about 40% off banks' reserve balances relative to their peak

in 2014, the Fed is now evaluating "the appropriate timing and approach for the

end of balance sheet runoff." Powell did not give a more specific timeline on

QT. 

     -Economic growth is expected to expand at a "solid" pace albeit slower than

in 2018. The job market should remain "strong" and inflation will run "close to"

2%. Wage growth also looks "stronger." Some data softened over last few months

but still point to spending gains this quarter. The partial government shutdown

is expected to have a "fairly modest" impact that will fade out over the next

few months. 

     -Uncertainty is elevated around several unresolved government policy

issues, including Brexit and trade negotiations. Volatile financial markets

toward year-end and slowing growth in some major foreign economies prompted the

Fed to shift its view between December and January. In December, the FOMC was

looking at reasons to undertake "further rate increases" but by January it had

decided to take a patient approach to "future policy changes." 

     -Longer run challenges include low productivity growth and lower labor

force participation among prime age workers compared other advanced economies,

as well as the unsustainable trajectory for federal government debt. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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