United States official warns of recession risk if interest rates go much higher

Powell on Watch

At the same time, Fed officials don't want to give the impression they think the US economy is vulnerable.

The Federal Reserve should be prepared to adjust its policy to protect the US economy from any sustained pressure from a global economic slowdown and volatility in financial markets, the Fed's second-in-command said on Thursday.

Powell was also asked about the Fed's plans to keep trimming its holdings of Treasury bonds and mortgage-backed securities, which it had purchased following the 2008 financial crisis as a way to keep long-term interest rates low and support an economy as it struggled to climb out of the worst recession since the 1930s.

However, Fed had lowered the growth forecast of the U.S. economy to 2.3 percent during the latest rate hike in December.

While markets may be concerned about global trade tensions and slower growth overseas, Powell said there is no evidence of a USA recession on the horizon. "We wanted to have the balance sheet return to a more normal level, which is a level no larger than it needs to be for us to conduct monetary policy", he said.

In a context of lower global growth forecasts, low inflation gives the US Fed time to pause and assess its policy stance in 2019, Fed vice-chair Richard Clarida said in a speech on January 10.

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"I don't see a recession" in 2019, Powell said Thursday in an interview at the Economic Club of Washington, D.C.

Fed officials judged in the minutes that "some further gradual increases" in the rate would be consistent with current economic status, given "current economic expansion, strong labor market conditions, and inflation near 2 percent over the medium term".

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. Two, instead of the predicted four rate hikes now seem to be realistic. The Fed has projected two more rate hikes, but Powell is now signaling the Fed will be "patient" on any further hikes. But many private economists think the central bank may end up raising rates just once this year if the economy slows significantly. He also made clear that applies to the Fed's approach to its US$4.1 trillion balance sheet, which the central bank is now reducing by a maximum of US$50 billion per month. Some policymakers said the Fed could also slow the pace of decline in reserves as it approaches the desired longer-run level.

Furthermore, with fears of a global economic slowdown despite a robust labor market domestically, the Fed is keen on exercising patience.

He repeated the Fed's newfound mantra that monetary policy, including the ongoing shedding of assets, is not on a "pre-set course".

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