The Federal Reserve will "watch patiently and carefully" in the coming months as it tries to gauge whether the economy will turn sour in 2019, Fed Chairman Jerome Powell said Jan. 10.
At an event in Washington, D.C., Powell said the year has started with two competing narratives about the economic outlook. On the one hand, financial markets are pricing in a more pessimistic view and worrying about a deceleration in global growth, a development that helped Fed officials nudge down their outlook on interest rate hikes this year.
But incoming economic data do not show "any evidence of a slowdown," Powell said, pointing to continued growth in labor markets, wages ticking up and inflation "staying right near" the Fed's 2% target.
The Fed has the "ability to be patient" to see which narrative will define 2019, the Fed chief said.
"We're in a place where we can be patient and flexible and wait and see what does evolve. We're waiting and watching," Powell said.
Powell's comments follow the release of the minutes from the December 2018 meeting of the Federal Open Market Committee, which has penciled in two rate increases this year. Most Fed officials think the central bank can "afford to be patient" on rate increases, the document showed.
On Jan. 9, two of the new voters on the FOMC, Boston Fed President Eric Rosengren and Chicago Fed President Charles Evans, said inflation pressures help give the Fed more flexibility but remained open to rate increases.
But St. Louis Fed President James Bullard, who also rotated into an FOMC voting spot this year, said in a Jan. 10 speech that lower inflation expectations are a "market signal that the current stance of monetary policy may be too hawkish."
Bullard said the Fed has "already been sufficiently pre-emptive" with its rate hikes to contain any upward pressure on inflation. He also said the flattening yield curve is a sign that markets "expect less inflation and less growth ahead" for the U.S. economy than Fed officials currently do.
“The FOMC should moderate its normalization campaign given that the yield curve is getting close to inversion," Bullard said, noting that yield curve inversions are historically associated with recessions.
In his appearance, Powell did not comment directly on the yield curve but said recession risks are not "at all elevated." The U.S. economy has good momentum, he said, though he added that his "principal worry" is whether weaker growth in Asia and Europe could spill over and affect the U.S.
He also commented on the partial U.S. government shutdown, saying the Fed will have a "less clear picture" of the economy if the Commerce Department is unable to publish critical data the Fed examines.
But he also noted that such impasses have generally not lasted long or done major damage to aggregate economic data, even though hundreds of thousands of families can be affected.
"[If] we have an extended shutdown, I do think that that would show up in the data pretty clearly," Powell said.