Federal Reserve Chairman Jerome Powell said Friday that muted inflation readings will give the central bank greater flexibility to set policy in the year ahead and that the Fed wasn't on a fixed path to push its benchmark interest rate higher.
"We will be prepared to adjust policy quickly and flexibly and use all of our tools to support the economy should that be appropriate," Mr. Powell said in response to volatility that has gripped markets in recent weeks. The Fed chairman was speaking on a panel with former Fed leaders at a conference in Atlanta.
Stocks rose on Mr. Powell's comments, with the Dow Jones Industrial Average rising nearly 600 points. Markets were earlier cheered by a strong jobs report that showed employers added a robust 312,000 positions in December.
Mr. Powell said markets have tumbled in recent weeks and aren't expecting any Fed rate increases this year because they are placing greater weight on downside risks that haven't yet materialized. U.S. data remains "on track" to sustain recent economic momentum, he said.
"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 said at the conference. When central bankers get conflicting signals, "policy is very much about risk management," he said, adding that the Fed is always prepared to shift the stance of policy to pursue its goals.
Some investors have been fixated in recent weeks on the Fed's process of shrinking its $4.1 trillion portfolio of bonds and other assets, which swelled during successive stimulus campaigns after the 2008 financial crisis.
The Fed initiated a plan to gradually shrink those holdings in October 2017 by allowing as much as $50 billion in bonds every month to mature without replacing them. That plan ran with little notice from markets for a year, but last fall, as stock markets began to tumble and government bond yields declined, some investors said the runoff was having a more pronounced effect.
Mr. Powell said Friday he doesn't think that is the case. The amount of bonds that the Fed is effectively putting back into the market by ending its reinvestments of some securities has been dwarfed this year by new debt issuance to fund government deficits by the U.S. Treasury, he said.
Mr. Powell said he doesn't think the portfolio runoff "is an important part of the story" of the recent market decline, but added, "if we reach a different conclusion, we wouldn't hesitate to make a change."
Mr. Powell also curtly addressed speculation that President Trump's unhappiness over monetary policy might lead to his removal as Fed chairman.
Mr. Powell said he wouldn't resign his post if Mr. Trump asked him to do so, which is important because it isn't clear whether the law would allow Mr. Trump to fire the Fed chairman.