Fed Vice Chair: "Patience is a Virtue" with Interest Rates

GS financial conditions index

GS financial conditions index

That prospect has cheered markets, which had grown anxious that the Fed was not taking into account a variety of headwinds that could slow US growth this year.

A range of Federal Reserve policymakers said last month they could be patient about future interest rate increases and a few did not support the central bank's rate increase that month, minutes from their December 18-19 policy meeting showed.

The comments were closely aligned with the tone set earlier Thursday by Fed Chairman Jerome Powell, who used the word "patient" or "patiently" five times to describe the Fed's approach to rate increases.

Minutes from the Fed's December 18-19 meeting showed that several policymakers were in favour of the U.S. central bank keeping rates steady this year. Yet markets sold off aggressively through the last three months of the year, reflecting concerns over global growth and a U.S.

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.

"This drop in the dollar is an overdue correction following a surprisingly robust few weeks despite the massive collapse in U.S. rate expectations", said Ulrich Leuchtmann, a currency strategist at Commerzbank.

"I would expect them to repeat that the economy is strong", Scotiabank economist Derek Holt said.

Another worry is that strong economies don't always remain strong, there's concern about what would happen if the USA hit another recession, CNBC reports.

While he has near weekly meetings with Treasury Secretary Steven Mnuchin, Powell said he has not met with Trump since taking over as Fed chairman, nor does he have any meetings with the president scheduled. Traders were already wary of statements Powell made in December about rate hikes.

The central bank lowered its projections on the number of rate hikes in 2019 from 3 to 2 during the latest rate hike announcement.

The European Central Bank is widely expected to remain accommodative in 2019, which should keep a lid on the single currency.

Powell noted that the Fed's holdings were around $1 trillion before the 2008 crisis.

The central bank "will not hesitate to make changes" to its balance sheet policy should the economic picture shift, Clarida said. Markets have expressed concerns that the Fed's operations to reduce the balance sheet could be depressing the markets and ultimately slow growth.

CNBC reports that the Fed had been holding almost $4.5 trillion worth of mostly Treasurys and mortgage-backed securities, which were accumulated during three rounds of monetary stimulus during and after the financial crisis.

"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 per cent on a sustainable basis, " Clarida said.

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