Federal Reserve Chairman Jerome Powell said the U.S. central bank can be patient before adjusting interest rates again as it waits to see how global risks impact the domestic economy.

“We’re in a place where we can be patient and flexible and wait and see what does evolve, and I think for the meantime we’re waiting and watching,” Powell said in a question-and-answer session Thursday at the Economic Club of Washington, D.C. “You should anticipate that we’re going to be patient and watching, and waiting and seeing.”

U.S. 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. They later rallied, with the S&P 500 Index closing about 0.5 percent higher. Treasury yields advanced with the dollar

The balance sheet “will be substantially smaller than it is now,” though bigger than it was before the crisis, Powell said. He said he didn’t know the exact level.

What Our Economists Say

“Chairman Powell chose to make no news at his latest interview. He simply reiterated the message from the latest FOMC minutes that policy makers regard the economic outlook as solid, despite intensifying downside risks. The recent data dependency mantra simply implies the Fed is taking a wait-and-see approach to be able to assess whether “tail risks” will weigh on economic performance.”– Yelena Shulyatyeva, Bloomberg Economics

U.S. central bankers are refining their message after the hawkish tone of their Dec. 19 statement and forecasts for further rate hikes in 2019 roiled financial markets. The Fed’s communications — and a Bloomberg News report that President Donald Trump had discussed firing Powell — helping bring on the worst December for stocks since the Great Depression.

Since the meeting, Fed officials have indicated they’re less inclined to keep raising than their statement and projections for two hikes in 2019 had suggested.

Powell said last week that he’s “listening sensitively to the message that markets are sending” about downside risks. Minutes of the December meeting released on Wednesday showed that many officials felt the central bank “could afford to be patient about further policy firming,” indicating the Fed could place interest rates on hold through March or longer as it waits for clarity on risks to global growth that could affect the U.S. economy.

Flexible Approach

The more flexible approach, apparent in the minutes and in recent speeches, has supported stock prices. Bloomberg’s financial conditions index has retraced much of its December tightening.

On Thursday, Powell said he hasn’t seen anything to indicate that the risk of a recession is elevated. The partial government shutdown is unlikely to leave a mark on the economy in the short term, though the Fed will have a less clear picture of growth without data from the Commerce Department, which releases figures including retail sales and gross domestic product.

At the same time, Powell acknowledged that financial markets are expressing concern about risks. The principal worry is global growth, he said in questioning by David Rubenstein, the co-founder of private-equity firm Carlyle Group, where Powell was previously a partner. Rubenstein also hosts an interview show on Bloomberg Television.

Powell also said he didn’t think it would be appropriate to reject an invitation to meet with Trump, but he hasn’t yet received such an invitation. Fed chairs have met with presidents in the past, he added.

Fed policy makers projected above-trend economic growth for this year in their December forecasts, and they expect the unemployment rate to fall further. 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. The unemployment rate stands at 3.9 percent and central bankers expect it to average 3.5 percent in the final three months of this year.

Even so, U.S. central bankers face a challenging year that’s complicating their communication. Financial markets are incorporating a variety of risks to the outlook, ranging from slowing global growth to the potential for a protracted trade war with China.

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