Shares lifted by Fed's patience on interest rates

GS financial conditions index

A key measure of US inflation was little changed in December while falling energy prices dragged down the broader gauge, giving the Federal Reserve little urgency to raise interest rates soon as it signals a more cautious approach in 2019. Core CPI is 2.2 percent higher, exactly where it was in November.

Federal Reserve Chairman Jerome Powell said Thursday that the central bank has the ability to be "patient" in determining when to hike interest rates. It would not want to wait too long to see overseas weakness affect the USA economy, he added.

USA central bankers are refining their message after the hawkish tone of their December 19 statement and forecasts for further rate hikes in 2019 roiled financial markets.

The monthly reductions, effectively running on autopilot, have been criticized by some as a steady tightening of financial conditions the Fed should reconsider.

Powell was also asked about the Fed's plans to keep trimming its holdings of Treasury bonds and mortgage-backed securities, which it had purchased following the 2008 financial crisis as a way to keep long-term interest rates low and support an economy as it struggled to climb out of the worst recession since the 1930s. "That was conditional on a very strong outlook for 2019", which may or may not materialize, with the Fed adjusting policy accordingly.

Even so, USA central bankers face a challenging year that's complicating their communication.

More news: Brazil's Bolsonaro confirms will participate in Davos

The falling price of oil has played a role in keeping prices low.

The prospect of rising interest rates that could slow the economy spooked investors and contributed to the downturn in USA and global stock markets late previous year. If conditions weaken, the Fed would react.

In a speech Wednesday, Charles Evans, president of the Fed's Chicago regional bank, said that modest inflation allowed the Fed to "wait and carefully take stock of the incoming data and other developments" before deciding on future rate hikes.

"The principle worry I would have is really global growth", Powell said, but he added: "I still think the mostly likely baseline case for China is another year of solid growth". He said an "extended" shutdown would show up in economic data "pretty quickly" and, since it shutters some agencies that provide economic data, it would also make the picture of the economy less clear for the Fed.

December figures for the Fed's preferred gauge of inflation - a separate measure related to consumption - are scheduled for release on January 31, though the report could be delayed because of the partial government shutdown.

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