Longer US government shutdown will hit economy, says Fed chief

Powell on Watch

Investors will be looking for new clues on US interest rate policy when Federal Reserve Chairman Jerome Powell speaks before the Economic Club of Washington on Thursday afternoon.

"I would expect them to repeat that the economy is strong", Scotiabank economist Derek Holt said.

"We're in a place where we can be patient and flexible", he said.

"It will be substantially smaller than it is now", Powell said Thursday at the Economic Club of Washington, adding that the balance sheet needs to be at a "more normal level" without clarifying what that level was. Yesterday the Australian share market closed 0.3 per cent higher or 17 points higher at 5,795. He said he didn't know the exact level.

Powell's second appearance in less than a week generated a subdued response in financial markets, a sign he may have found his footing in how to describe central bank policy without surprising investors. It would not want to wait too long to see overseas weakness affect the US economy, he added. The Fed's communications - and a Bloomberg News report that President Donald Trump had discussed firing Powell - helping bring on the worst December for stocks since the Great Depression.

United States central bankers are refining their message after the hawkish tone of their Dec 19 statement and forecasts for further rate hikes in 2019 roiled financial markets.

Speaking to an audience in Washington, D.C, Powell delivered the same reassuring message that bolstered markets last Friday.

He also said that the Fed had no preset path for rate hikes and would be "patient" when determining whether to hike interest rates further in response to strong USA growth that risks sparking inflation, or to pause rate hikes to account for a global economic slowdown.

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.

JPMorgan Chase has estimated that the partial government shutdown - which is 20 days old Thursday - is shaving $US1.5 billion off the economy each week, a modest amount in the context of a $US20 trillion economy, the damage will keep growing. "The principal worry I would have is global growth". Rubenstein also hosts an interview show on Bloomberg Television.

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.

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