January 11, 2019: Already-jittery US stock markets temporarily shot lower on Thursday following another remark from Federal Reserve Chairman Jerome Powell.
The central bank chief has been unusually outspoken in recent weeks with comments that seemed to be geared at calming nervous investors but an offhand comment at an event Thursday had the opposite effect.
On Wall Street, after five days of gains, the benchmark Dow Jones Industrial Average briefly dropped more than 250 points from the day's high after Powell said the Fed's large securities holdings should be “substantially smaller” than the current level of just under $4 trillion.
Despite his largely upbeat view on the US economy, and clear signals the Fed will be patient about raising interest rates any higher — statements that helped equities to recovery — markets focused on those two words.
At the close, Wall Street finished up for the day but it does not take much for investors to run for the exits, with markets already on edge amid concerns the global economy is slowing just as interest rates are rising and uncertainty about the US-China trade war.
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.
However, in prepared remarks released later Thursday in New York, Fed Vice Chairman Richard Clarida reiterated the central bank's reassurance that if needed it could stop or slow the drawdown of its securities holdings.
The central bank “will not hesitate to make changes” to its balance sheet policy should the economic picture shift, Clarida said.
Powell had roiled markets in early October when he indicated several more rate increases were likely and since then he and other senior officials have come out multiple times with more soothing comments.
The Fed chief on Thursday again stressed that policymakers could take time to evaluate the economy before deciding on any additional rate moves.
Asked about the expectations for the Fed's policy meeting later this month, Powell said, “you should anticipate we are going to be patient and watching and waiting and seeing.”
Starting after the January 30 announcement, Powell will hold a press conference after every meeting, rather than just four times a year, giving him many more opportunities to try to communicate with financial markets.
He remains upbeat about the US economy, saying inflation is likely to hold near the Fed's two percent target, and does not see a risk of a US recession anytime soon.
However, he acknowledged the concerns reflected in global stock markets and said the Fed had “the ability to be patient and figure out which of these two narratives is going to be the story of 2019.”
Long shutdown hit
He also warned the US economy could take a clear hit from the government shutdown if it continued for a long time.
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.”
The US government has been partially shuttered since late December as President Donald Trump has refused to sign a budget agreement unless Congress agrees to allocate more than $5 billion for a border wall.
About 800,000 federal workers, including air traffic controllers and members of the Coast Guard, have been without pay for three weeks.
“In the short term if government shutdowns don't last very long they've typically not left much of a mark on the economy,” Powell said.
S&P Global Ratings estimated that the shutdown will trim 0.05 percent off of US GDP each week.
Powell also worried about the lack of key economic statistics during the government shutdown that the Fed uses to take the temperature of the economy, such as retail sales and GDP growth.