WASHINGTON (AFP, REUTERS, BLOOMBERG) - The US economy could take a clear hit from the government shutdown if it continues for a long time, Federal Reserve Chairman Jerome Powell said on Thursday (Jan 10).
While most previous shutdowns have been fairly short and have not affected the economy in the aggregate, Mr 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 US$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," Mr Powell said.
He also worried about the lack of key economic statistics during the government shutdown that the Fed uses to take the temperature of the economy.
Speaking at the Economic Club of Washington, Powell reiterated that the US central bank has the ability to be patient on monetary policy given stable price measures. He downplayed predictions from policymakers suggesting interest rates would be raised twice more this year.
With no sign of excessive inflation or outsized risk in financial markets, Powell said the Fed would be "waiting and watching" in coming months to see which of those two competing "narratives" plays out.
"Especially with inflation low and under control, we have the ability to be patient and watch patiently and carefully as we ... figure out which of these two narratives is going to be the story of 2019," Powell said.
US stocks initially turned lower after Powell said the central bank is sticking with its process of shrinking its balance sheet to a more normal level, which removes stimulus put into place to revive the economy following the financial crisis and recession a decade ago. They later rallied, with the S&P 500 Index closing about 0.5 per cent higher.
The balance sheet "will be substantially smaller than it is now," though bigger than it was before the crisis, Powell said. He said he didn't know the exact level.
US 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. 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.
Since the meeting, Fed officials have indicated they're less inclined to keep raising than their statement and projections for two hikes in 2019 had suggested.