Powell says Fed is nearing decision on balance sheet runoff

Jermaine Castillo
March 3, 2019

Amid signs of a global slowdown, the Fed chair said the US financial system is "so much more resilient and stronger than before the financial crisis", dampening concern that the USA will face another recession like 2008.

The Fed will be "paying close attention to global economic and financial developments and assessing their implications for the outlook", he said.

Powell's prepared testimony before the House panel was identical to his remarks Tuesday before the Senate Banking Committee. With rising demand for currency around the world, and from US banks for reserves held at the central bank, Fed policymakers now believe a big balance sheet is necessary just to ensure it has proper control over the short-term interest rates it sets to manage the economy.

He cited the slowing US economy, which could pressure the stock market again.

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Amid the risks, Powell said that the solid increase in the past year in the proportion of Americans working or looking for work was very encouraging.

"While we view current economic conditions as healthy and the economic outlook as favourable, over the past few months we have seen some crosscurrents and conflicting signals", Powell said, adding that the central bank is monitoring how Brexit negotiations and Sino-U.S. trade talks play out.

The Fed raised rates four times previous year but put policy on pause last month. Although they initially indicated the process could take years - the balance sheet has since decreased to $4.01 trillion - the latest discussions suggest the runoff will end much quicker than originally anticipated.

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That comment came in response to a question from Rep. Al Green, D-Texas, who noted that President Donald Trump had attacked the Fed's interest rate decisions repeatedly previous year. We are going to allow the situation to evolve. and allow the data to come in. Furthermore, Powell said that economic data will continue to be the primary driver in future Fed decisions, but will be more flexible with the inclusion of new data. Despite the progress, the labor force participation rate remains lower in the United States than most other wealthy nations, he said.

"Big corrections in equity prices - our forecast is that the S&P 500 will end this year about 18 percent below its level now - have often given the US dollar a boost in the past", Higgins said.

"The idea that deficits don't matter for countries that can borrow in their own currency, I think, is just wrong", Powell said.

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