- Fed Chairman Jerome Powell said the central bank will be "patient" in its approach to monetary policy.
- "There is no preset path" for raising rates or adjusting the balance sheet, Powell said during a roundtable with former Fed chairs Janet Yellen and Ben Bernanke.
- Powell said the US economy is in strong shape and believes the market is pricing in "downside risks" that aren't visible yet.
- However, he said the Fed is "listening very carefully" to the market.
Federal Reserve Chairman Jerome Powell pledged that the central bank will be watching how the economy performs this year and will adjust policy should growth slow unexpectedly.
Financial markets have been in turmoil over the past several months, in part over concern whether the Fed was on an aggressive rate-hiking path. Powell himself has helped to fuel some of that speculation, and on Friday offered remarks to show that Fed policy will take into account economic conditions and be adjusted accordingly.
"As always, there is no preset path for policy," Powell said. "And particularly with muted inflation readings that we've seen coming in, we will be patient as we watch to see how the economy evolves."
The policymaking Federal Open Market Committee raised its benchmark interest rate four times in 2018 and has indicated that two more increases this year are likely. However, markets believe differently, and in fact are pricing in about a 28 percent chance of a rate cut by the end of 2019 and no chance of an increase.
The Powell Fed has come under scrutiny from the markets and intense criticism from President Donald Trump, who believes the rate hikes pose the single biggest threat to an otherwise thriving economy. Asked whether he would resign if pushed by the president, Powell said "no."
Powell said the Fed has a history of adjusting its actions according to conditions. The Fed is "always prepared to shift the stance of policy and to shift it significantly" in order to achieve its dual mandate of full employment and stable prices.
He cited 2016 as a recent example. In that year, the FOMC had indicated four rate hikes were likely but ended up only approving one as financial conditions tightened particularly amid geopolitical concerns.
"No one knows whether this year will be like 2016," he said. "But what I do know is that we will be prepared to adjust policy quickly and flexibly and to use all of our tools to support the economy should that be appropriate to keep the expansion on track, to keep the labor market strong and to keep inflation near 2 percent."
Economic signals as of late have been mixed.
Less than two hours before the Fed panel began, the Labor Department reported that nonfarm payrolls grew by 312,000 in December, the best gain since February and well above Wall Street expectations. However, a key manufacturing report Thursday showed signs of a slowdown, and housing data has been disappointing as well.
Though Powell said the economy still looks strong, he noted that markets are pricing in "downside risks," particularly in the slowdown from China. He said the market is "obviously well ahead of the data" but pledged that 'we're listening very carefully" to the signals it is sending.
The market briefly touched an intraday bear market, or 20 percent decline from its most recent high, in December and has been subject to volatile swings. Stocks gained sharply Friday following the jobs report and added to those gains as Powell spoke.
Policy adjustments wouldn't be limited to interest rates either.
Powell said the Fed also is aware of concerns over the reduction of its balance sheet, which is loaded with Treasurys and mortgage-backed securities that the central bank purchased to stimulate the economy during and after the financial crisis. The Fed is allowing $50 billion of the proceeds it gets from those bonds to run off each month and reinvesting the rest.
Though the total is small compared to the $4 trillion size of the balance sheet, markets have worried that the policy amounts to "quantitative tightening" as opposed to the quantitative easing employed during the stimulus efforts.
"We don't believe that our issuance is an important part of the story of the market turbulence that began in the fourth quarter of last year," he said. "But I'll say again, if we reach a different conclusion, we wouldn't hesitate to make a change. If we came to the view that the balance sheet normalization or any other aspect of normalization was part of the problem, we wouldn't hesitate to make a change."
Powell had said in December that he didn't see a reason to adjust the balance sheet run-off.