Powell tells market Fed is flexible, aware of risks

U.S. Federal Reserve Chairman Jerome Powell on Friday sought to ease market concerns that the U.S. central bank was ignoring signs of an economic slowdown, saying he was aware of the risks and would be patient and flexible in policy decisions this year.

Speaking after months of volatility in world bond and stock markets, Powell avoided some of the communication missteps that in the past have roiled rather than calmed investors.

He also pledged to stay in his job even if asked to quit by U.S. President Donald Trump, who has been critical of him.

Echoing a more sympathetic tone recently espoused by some of his colleagues, Powell said the Fed was “listening” to markets and would balance the steady flow of strong economic data against the array of risks — from slowing global growth to worries about the U.S.-China trade war — that have spooked investors.

The message was heard on Wall Street, where major stock indexes surged about 3.5 percent to a more than two-week high. The market bounce came after a volatile December selloff in which traders grew increasingly skeptical of the Fed’s upbeat forecasts and plans to keep hiking interest rates in 2019.

“Particularly with the muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves,” Powell told the American Economic Association in Atlanta.

The Fed, which hiked benchmark U.S. interest rates four times last year including in December, is, however, not on a preset path and could pause policy tightening as it did in 2016 when global growth concerns led to doubts about the U.S. economic recovery, he said.

“We are always prepared to shift the stance of policy and to shift it significantly” if needed, Powell said, speaking on a panel alongside former Fed chiefs Janet Yellen and Ben Bernanke. That flexibility, he added, applied as well to the monthly reductions to the Fed’s balance sheet.

The Fed chief stressed that the economy remained on track and that the job market was quite strong. He did not address Fed forecasts from December that sketched out two more rate rises this year, but, combined with the messages of Fed presidents who in recent days downplayed that tightening plan, he delivered the sort of temperate message investors had hoped to hear.

“We really need to be looking at the data and having the economy tell us, do we need to move more? Do we need to move more, faster? Can we wait?” Cleveland Federal Reserve Bank President Loretta Mester said in an interview with Reuters. “We should take our time and assess ... We may be where we need to be.”

Her comments, from a sometimes hawkish Fed official, highlighted the change in tone at a central bank that, after two years of roughly quarterly rate increases, was now assessing the risks of going too far.

Following Powell’s remarks, Treasury yields rose and futures traders began pricing in a small chance of a rate hike this year, versus no chance seen before Powell began speaking.

Compared to comments he made after the Fed raised rates last month, “it’s not that he’s changed his message ... but that he explained it more patiently and in greater detail,” said Lou Brien, market strategist at DRW Trading in Chicago.

Powell’s appearance in Atlanta was his first since last month’s rate increase and a public lashing from Trump, who according to sources asked aides about his power to fire the Fed chairman.

The head of the Fed, once confirmed by the Senate, can only be removed “for cause,” not a policy disagreement. Powell responded with a terse “No” when asked if he would resign if Trump requested him to do so.

The recent market turbulence has posed a dilemma for the Fed, as a seeming loss of confidence in financial markets about the U.S. economy’s prospects was offset by upbeat data from the real economy, including a strong December jobs report.