Powell Still Patient, but Balance Sheet Comments Raise Concerns

Investing.com -- Federal Reserve Chairman Jerome Powell reiterated his statement that the FOMC would be patient on monetary policy Thursday, but he hit equity markets after raising worries again that quantitative tightening of the Fed's balance sheet would be on autopilot.

The S&P 500 was flat in afternoon trading, but sentiment on equities turned sour somewhat as Powell said the Fed's balance sheet will be "substantially smaller," indicating the central bank will press ahead with its balance sheet wind-down operation, which peaked at roughly $4.5 trillion in Jan. 2015, but has now narrowed to about $4 trillion.

The Fed chief did not give a timeline for winding down the balance sheet.

On interest rates, Powell said the central bank will be "patient," as it weighs the pace of global growth and domestic inflation, reaffirming investor expectations for a slower pace on monetary policy tightening.

Powell's cautious tone served as another sign that the Fed is no hurry to hike up rates and comes just a day after the release of the central bank's December meeting minutes, in which policymakers cited waning inflation, worsening financial conditions and slowing global growth as reason to 'be patient about further policy firming.

Powell also touched on the growing disparity between good momentum in economic data and concerns in financial markets over risks, stressing the underlying economy remained robust.

"Especially with inflation low and under control we have the ability to be patient and watch patiently and carefully as we ... figure out which of these two narratives is going to be the story of 2019," he said.

Powell downplayed the short-term impact of the ongoing U.S. government shutdown, which entered its third week Monday, but said an extended shutdown would lead to a less clear picture of the economy on which to base monetary policy decisions.

In the midst of the ongoing trade spat between the US and China, the Fed chairman said Apple's (NASDAQ:AAPL) iPhone sales warning shows growth is slowing in China, though he still expected the Chinese economy to generate "solid growth" this year.

Powell also expressed concern about the bulging amount of U.S. debt, which stands at about $21.9 trillion, saying he was "worried about it.”

-- Reuters also contributed to this report.

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