Fed chair is ‘very worried’ about ballooning debt U.S. will inevitably face

GS financial conditions index

US stocks initially turned lower after Powell said the central bank is sticking with its process of shrinking its balance sheet to a more normal level, which removes stimulus put into place to revive the economy following the financial crisis and recession a decade ago.

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".

U.S. Treasury debt prices erased early gains after a soft 30-year bond auction and in reaction to Powell's comments on the Fed "substantially" reducing the size of its balance sheet.

Clarida is the latest U.S. central banker to refine the Fed's monetary message after the hawkish tone of their Dec 19 statement and forecasts for further rate hikes in 2019 roiled financial markets.

Since the meeting, Fed officials have indicated they're less inclined to keep raising than their statement and projections for two hikes in 2019 had suggested.

But Fed Chairman Jerome Powell also sought to reassure financial markets last week, saying policymakers will be "patient" before making any further moves as they watch to see how the economy evolves and could react quickly to any changes.

"Growth prospects in other economies around the world have moderated somewhat in recent months, and overall financial conditions have tightened materially, " he said in the text of a speech late on Thursday in NY.

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On Thursday, Powell said he hasn't seen anything to indicate that the risk of a recession is elevated.

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.

His biggest concern is weakening growth in China and Europe, although he warned a prolonged US government shutdown could become a drag on the economy.

St. Louis Federal Reserve Bank President James Bullard speaks at a public lecture in Singapore, Oct. 8, 2018.

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.

Powell and others have been less demonstrative and noted that economic data remains strong, particularly after a recent payroll report that showed more than 300,000 jobs added in December.

He agreed with the prevailing view of the USA economy slowing to around 2.25-2.5 per cent this year, with unemployment holding around the current 3.9 per cent.

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