United States official warns of recession risk if interest rates go much higher

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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).

Speaking to an audience in Washington, D.C, Powell delivered the same reassuring message that bolstered markets last Friday.

"I don't see a recession", Powell said.

While markets may be concerned about global trade tensions and slower growth overseas, Powell said there is no evidence of a US recession on the horizon.

"Growth prospects in other economies around the world have moderated somewhat in recent months, and overall financial conditions have tightened materially, " he said in the text of a speech late Thursday in NY.

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"We have the ability to be patient and watch patiently and carefully as we see the economy evolve and figure out which of these two narratives is going to be the story of 2019", Powell said.

Trump has urged the Fed not to raise interest rates at all this year.

The balance sheet "will be substantially smaller than it is now", though bigger than it was before the crisis, Powell said. "We don't get distracted".

President Donald Trump has been a vocal critic of Powell.

Trump stepped up his criticism of the Fed's string of rate hikes previous year after the market started falling sharply in October.

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The speech reinforces comments by other policy makers this month that the Fed is likely to keep interest rates on hold through at least March following four hikes in 2018.

The Fed chair will be taking questions in what will be his first major comments since the central bank took a decidedly more cautious tone about its future pace of interest rate hikes.

Even so, US central bankers face a challenging year that's complicating their communication. Traders were already wary of statements Powell made in December about rate hikes.

Fed officials and many forecasters expect growth to slow in 2019, but to remain strong enough to continue generating jobs and keeping the unemployment rate near its nearly 50-year low. Before the Fed began buying bonds in the face of the 2007-2009 recession, it had about $900 billion in assets. He also made clear that applies to the Fed's approach to its $4.1 trillion balance sheet, which the central bank is now reducing by a maximum of $50 billion per month.

Powell noted that the Fed's holdings were around $1 trillion before the 2008 crisis. He said he didn't know the exact level. Markets have expressed concerns that the Fed's operations to reduce the balance sheet could be depressing the markets and ultimately slow growth.

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