Longer US government shutdown will hit economy, says Fed chief

Consumer credit outstanding

Consumer credit outstanding

"We are in a place where we can be patient and flexible and see what does evolve", Powell said.

That prospect has cheered markets, which had grown anxious that the Fed was not taking into account a variety of headwinds that could slow USA growth this year. He said an "extended" shutdown would show up in economic data "pretty quickly" and, since it shutters some agencies that provide economic data, it would also make the picture of the economy less clear for the Fed.

Trump has urged the Fed not to raise interest rates at all this year.

"The long-run fiscal, nonsustainability of the U.S. federal government isn't really something that plays into the medium term that is relevant for our policy decisions", Powell added.

Speaking to an audience in Washington, Powell delivered the same reassuring message of restraint and flexibility that bolstered markets last Friday. "It's a tightly integrated economy and financial markets will see the effects of that", he said.

The US Dollar continues to be weighed down by the growing market conviction that the US central bank might slow the pace, or perhaps even pause the rate hike cycle in 2019, reinforced by the Fed Chair Jerome Powell's comments on Thursday.

The monthly reductions, effectively running on autopilot, have been criticized by some as a steady tightening of financial conditions the Fed should reconsider.

On Thursday, Powell said he hasn't seen anything to indicate that the risk of a recession is elevated. The principal worry is global growth, he said in questioning by David Rubenstein, the co-founder of private-equity firm Carlyle Group, where Powell was previously a partner.

At the same time, Powell said there are concerns in financial markets about slowing global growth and rising trade tensions.

"It will be substantially smaller than it is now", Powell said.

While those initial comments boosted stocks, they later slipped when Powell said the Fed would shed significantly more assets than it already has.

While there is wide agreement that the United States economy will grow more slowly than the roughly 3 per cent rate of 2018, there's a lot of debate about how fast the slowdown will be.

In a speech Wednesday, Charles Evans, president of the Fed's Chicago regional bank, said that modest inflation allowed the Fed to "wait and carefully take stock of the incoming data and other developments" before deciding on future rate hikes.

The head of the Federal Reserve also warned that while his department has no official projection on the current government shutdown, it can still have a damaging effect on the national economy.

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