MNI POLICY: Fed's Powell Pledges Patience Amid Muted Inflation

By Jean Yung

     WASHINGTON (MNI) - Federal Reserve Chairman Jay Powell on Friday said the

central bank would be patient in light of muted inflation and conflicting

signals from financial markets and economic data, suggesting the FOMC is not

contemplating any immediate interest rate change.

     Markets have lurched from expecting a couple of rate hikes this year to a

rate cut in recent weeks as stocks fell and concerns mounted over global growth.

The FOMC in December said it still projected two rate increases this year as

labor markets were set to remain tight and inflation to hover around 2%, but

markets were significantly more pessimistic.

     "With the muted inflation readings that we've seen coming in, we will be

patient as we watch to see how the economy evolves," Powell told a conference in

Atlanta.

     The S&P500 rose more than 2% after Powell's remarks, while bets that there

was a 30% chance the Fed would cut rates by June evaporated.

     Following are other key points from the Fed chair's talk at the American

Economic Association conference:

     - The Fed is "listening carefully" to markets, which, in conflict with

strong economic data, are signaling downside risks. "When you get conflicting

signals, policy is very much about risk management."

     - The balance sheet reduction program, currently operating on autopilot,

has "served the economy well," but the Fed "wouldn't hesitate" to change the

policy if it deemed the plan to be interfering with the Fed's goals. The monthly

caps on reinvestment are "not that big" compared to Treasuries issuance so far.

     - Hard data suggests "ongoing momentum" in the economy. The December jobs

report, showing 312,000 new jobs created, was "very strong," while the 0.4%

advance in average hourly earnings "does not raise concerns about too-high

inflation." The latest ISM Manufacturing index, though well below expectations

and "worth keeping an eye on," is consistent with ongoing growth. "We have

unemployment under 4% for nine months now, and we have inflation under control,

and I think that's a pretty good outcome."

     - There are signs of a growth slowdown in China, but Chinese authorities

are responding, and Powell expects China and other emerging market economies to

continue to post "still solid growth" this year.

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

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