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Fed officials acknowledge risks, but focus on positives in US after Brexit

FederalReserve officials have taken a cautious approach in their response to the U.K.'sBrexit vote, and in recent days several have gone public in attempting to reassuremarkets about the outlook for the U.S. economy.

The voteto leave the European Union caught many investors by surprise and set off turmoilin global markets as it brought down a cloud of uncertainty about its impacts onthe U.K., the EU and the rest of the global economy. Minutes of the last meetingof the Federal Open Market Committee, held just a week before the vote, reveal thatU.S. policymakers were more focused on the lackluster May jobs report and what thatindicated about the direction of the U.S. economy.

Theyagreed, however, that the outcome of the Brexit vote was uncertain and that theyneeded to monitor its results and the impacts on the global markets. The U.S. centralbank hewed close to that language in the immediate aftermath of the vote, sayingit would "carefully monitor" global market developments.

But Fedofficials have also tried to walk a fine line between acknowledging the uncertaintyand downside risk of the Brexit vote while also trying to draw attention back tothe positive developments in the domestic economy. Federal Reserve Governor JeromePowell said during a June 28 speech that he expects the U.S. economy will continueto grow, and he said that after much progress that "many … indicators suggestthat the labor market is strong" and has probably neared its post-crisis naturalrate of unemployment.

San FranciscoFederal Reserve President John Williams also tried to strike an uplifting tone,saying in an interview published this week that market reaction had actually notbeen outsized versus expectations. He also said he might lower his forecast of about2% growth by about 0.10 of a percentage point because of Brexit effects.

"I'mnot trying to downplay Brexit. I'm just saying that with a little bit of time peoplehave kind of gotten more reasonable" and tried to determine exactly how largean impact on the world the vote might have, Williams said. "When you do that,it doesn't seem quite a big deal for the U.S. economic outlook," he added.

Despitethe show of positive sentiment, though, Fed policymakers seem to be edging towarda much more cautious outlook. Powell, for example, noted that the downside riskto the global outlook had grown considerably.

Fed GovernorDaniel Tarullo said much the same as he made a round of public appearances thisweek. He stressed that the decisions of the FOMC remain "data dependent"but admitted that Britain and Europe are really just entering "the first chapter"in a long exit saga full of uncertainty. "When there's uncertainty, as everyoneknows, there is an inhibiting effect on investment decisions and maybe householddecisions as well," Tarullo said during an interview with The Wall Street Journal. He added that hefelt terming the Fed's potential rate hike as a "normalization" was incorrectand argued that interest rates should reflect many economic factors. In the currentenvironment, the below-target inflation means that policymakers can look for evenmore improvement in the labor market.

"Thisis not an economy that's running hot," Tarullo argued.

Also,Federal Reserve Bank of New York President William Dudley made it clear that theuneasy global markets mean the Fed has more time to assess incoming data withoutfeeling pressured to make a move. Inflation running consistently below its long-runtarget means that the Fed can be patient in positioning itself for a rate hike,Dudley said July 5.