USA official warns of recession risk if interest rates go much higher

Consumer credit outstanding

He also said he would "be patient" as the central bank determines when to hike interest rates next. "It's a tightly integrated economy and financial markets will see the effects of that", he said.

In remarks at an appearance in Little Rock, Arkansas, on Thursday, St. Louis Fed President James Bullard was blunt, saying that the central bank had reached the "end of the road" in its current rate increase cycle.

Powell's second appearance in less than a week generated a subdued response in financial markets, a sign he may have found his footing in how to describe central bank policy without surprising investors. "The principal worry is global growth", he said.

USA 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. It would not want to wait too long to see overseas weakness affect the USA economy, he added. Those forecasts appear supported by a robust December labor-market report, which showed the economy added 312,000 non-farm jobs, the most in 10 months.

Asked what qualifies for "normal", Powell said "I don't know the exact level."He noted that the balance sheet has declined to about $4 trillion, but that before the 2008 crisis it was below $1 trillion. Big picture: they don't have that much further to go and they don't have to go there fast", said Robert Tipp, chief investment strategist with PGIM Fixed Income in Newark, New Jersey".

Still, Powell's comments and those of other officials "are developing a new narrative".

He agreed with the prevailing view of the USA economy slowing to around 2.25-2.5 per cent this year, with unemployment holding around the current 3.9 per cent.

Since then, stock markets endured a topsy-turvy end to the year as the USA government shut down and global trade tensions ratcheted higher. If conditions weaken, the Fed would react.

He also anxious about the lack of key economic statistics during the government shutdown that the Fed uses to take the temperature of the economy.

"Notwithstanding strong economic growth and a low unemployment rate, inflation has surprised to the downside recently, and it is not yet clear that inflation has moved back to 2 percent on a sustainable basis, " Clarida said.

The Fed chair, who has been publicly criticised repeatedly by President Donald Trump in recent months, warned that if there is an "extended shutdown", it would have an impact on the economy that "would show up in the data very clearly".

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