By Howard Schneider
Speaking after months of volatility in world bond and stock markets, Powell said the Fed would be flexible in deciding future interest rate hikes, balancing the steady flow of strong economic data against an array of risks, from slowing global growth to worries about trade, that have spooked investors.
"Particularly with the muted inflation readings that we've seen coming in, we will be patient as we watch to see how the economy evolves," he told the American Economic Association, adding that the Fed is not on a preset path of tightening policy and suggesting it could pause rate increases as it did in 2016 when global growth concerns led to doubts about the U.S. economic recovery.
It was the sort of temperate message investors had hoped to hear after becoming concerned the Fed planned to plow ahead with further rate increases on the basis of low unemployment and concerns that it could boost future inflation.
Major U.S. stock indexes added to gains after Powell's comments, with the S&P 500 index <.DXY> up more than 3 percent in early afternoon trading. U.S. Treasury yields also rose.
"We are always prepared to shift the stance of policy and to shift it significantly" if needed, said Powell, who spoke on a panel in Atlanta alongside former Fed chiefs Janet Yellen and Ben Bernanke.
That flexibility, Powell said, applied as well to the monthly reductions to the Fed's balance sheet.
Powell said he did not think the steady decline in the Fed's bond holdings was having much impact on markets, but that it would be changed if it started interfering with the central bank's broader goals of maintaining strong employment and stable inflation. While not a change in policy, it was a nod to market concerns that the Fed had a key decision on "auto-pilot" even as it pledged to be dependent on economic data.
Compared to comments he made after the Fed raised rates last month, "it's not that he's changed his message ... but that he explained it more patiently and in greater detail," said Lou Brien, market strategist at DRW Trading in Chicago.
Powell's appearance in Atlanta was his first since the December rate increase and a public lashing from President Donald Trump, who reportedly asked aides about his power to fire the Fed chairman.
Once confirmed by the Senate, the head of the Fed can only be removed "for cause" - not a policy disagreement - and Powell responded with a terse "no" when asked if he would resign if Trump requested him to do so.
DOWNSIDE RISKS
The recent market turbulence has posed a dilemma for the Fed, as a seeming loss of confidence in financial markets about the U.S. economy's prospects was offset by upbeat data from the real economy, including a strong December jobs report.
The Labor Department reported on Friday that 312,000 jobs were created last month, well above market expectations. Wages and labour force participation both rose, signalling sustained economic strength.
"The markets are pricing in downside risks ... and they are obviously well ahead of the data, particularly if you look at this morning's labour market data," Powell added.
The Fed chairman added: "I'll just say that we are listening carefully to that ... listening sensitively to the message that markets are sending and we are going to be taking those downside risks into account as we make policy going forward."
But the jobs report was "very strong," Powell said, with U.S. data "on track to sustain good momentum into the new year."
The Fed hiked rates four times last year, including in December when policymakers' forecasts pointed to two more rises this year. Markets, however, have mostly tumbled since October on fears of a global economic slowdown and the ongoing U.S.-China trade war.
Futures traders on Friday were pricing in a small chance of a rate hike this year, versus no chance seen before Powell began speaking.
(Reporting by Howard Schneider; Writing by Ann Saphir and Jonathan Spicer; Editing by Chizu Nomiyama and Paul Simao)
(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)