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Fed's Powell sees solid but slower U.S. economic growth in 2019

Kitco News

WASHINGTON (Reuters) - The U.S. economy will grow at a solid though slower pace in 2019 and the Federal Reserve will remain “patient” in deciding whether to further raise interest rates, Fed Chairman Jerome Powell said on Tuesday.

Powell reaffirmed the policy shift made by the U.S. central bank last month, telling a Senate Banking Committee hearing that “crosscurrents and conflicting signals” had weakened the case for further rate increases and made an otherwise positive economic outlook less certain.

“We view current economic conditions as healthy and the economic outlook as favorable,” Powell told lawmakers, projecting that the economy would expand at a solid pace in 2019, albeit somewhat slower than in 2018, and the job market would remain strong.

U.S. Treasury yields ticked up modestly. The 2-year benchmark rose to 2.49 percent, from 2.48 percent, after the release of Powell’s prepared remarks to the committee. The S&P 500 index pared earlier losses and was trading flat around midday.

The Fed now estimates that gross domestic product grew by slightly less than 3 percent in 2018. The U.S. government is scheduled on Thursday to release its fourth-quarter GDP report, which was delayed by the recent partial U.S. government shutdown.

“Some data have softened but still point to spending gains this quarter,” Powell said, highlighting the sometimes contradictory set of information the Fed grappled with at year’s end.

That included a global market sell-off, fears of a widening U.S.-China trade war, slow growth among major U.S. trading partners and worries that the Fed itself would raise rates more aggressively than conditions warranted.

Recent retail sales data were disappointing and some Fed officials have worried that inflation could slip, though Powell said the central bank still feels the pace of price increases will remain close to its 2 percent target after accounting for the temporary influence of lower oil prices.

The recent 35-day government shutdown added to those U.S. growth concerns, though Powell said it is expected to have had a fairly modest impact on the overall economy that will largely unwind in the coming weeks as workers, for example, receive back pay for missed time.

POLITICAL SHIFT

Powell is also due to appear before the House Financial Services Committee on Wednesday. The two hearings are part of the semi-annual rounds of testimony the Fed chief delivers to Congress each year.

It will be Powell’s first since Democrats won control of the House of Representatives in the November elections.

The budding 2020 presidential campaigns of several Senate and House committee members could influence the tenor of the hearings.

Questions from senators on Tuesday ranged across a variety of issues, from the sources of rural poverty to the stance the Fed would take toward a proposed megamerger between U.S. regional lender BB&T Corp and rival SunTrust Banks Inc.

Pressed by Senator Elizabeth Warren, a Massachusetts Democrat running for president, Powell pledged an “open and transparent” review of the deal. Warren said she was skeptical given the Fed’s track record of approving almost all bank mergers.

“The economy looks great from a corner office on Wall Street, but it doesn’t look so great from a house on Main Street,” said Senator Sherrod Brown, an Ohio Democrat who is considering a White House run.

After raising rates four times in 2018, and anticipating further hikes in 2019, the Fed in January switched to a new “patient” stance as concerns about the global economy took root, and global markets voiced doubts about the U.S. recovery.

In addition, the Fed is now debating when and how to stop the monthly rundown of its balance sheet, an issue that has been a priority particularly for Republican lawmakers who generally want the central bank to have a smaller financial footprint.

Recent comments by Fed officials have pointed to the likely need for a larger balance sheet, currently at around $4 trillion, and a willingness to use it more regularly to fight future economic downturns.

This week’s hearings also follow a steady barrage of public comments by President Donald Trump that were critical of Powell and the Fed - comments lawmakers will likely focus on to understand what if any influence they have had on a central bank designed to set rates independent of political influence.

Powell’s first sessions as Fed chief last February and July were largely congenial affairs compared to the sometimes testy exchanges between House Republicans and former Fed Chair Janet Yellen.

Reporting by Howard Schneider; Additional reporting by Trevor Hunnicutt in New York; Editing by Paul Simao

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