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Fed Chair Jerome Powell warns an extended shutdown could damage the economy

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Federal Reserve Chairman Jerome H. Powell at the Economic Club of Washington on Thursday said the government shutdown could be harmful but was otherwise mostly upbeat.
(Saul Loeb / AFP/Getty Images)

Federal Reserve Chairman Jerome H. Powell warned on Thursday that an extended partial government shutdown could damage the U.S. economy and starve the central bank of key data it needs to make monetary policy decisions.

“If we have an extended shutdown, I do think that would show up in the data pretty clearly,” Powell said during an appearance at the Economic Club of Washington.

About one-quarter of the federal government has been shut down since Dec. 22 because of a dispute over $5.7 billion in funding President Trump is seeking from Congress to build a wall on the U.S. border with Mexico.

The dispute is showing no signs of ending after Trump walked out of a Wednesday negotiating session with lawmakers after Democratic leaders would not agree to his demand for the wall funding.

Powell said past government shutdowns had not caused serious economic damage because they didn’t last long.

“If government shutdowns don’t last very long, they have typically not left much of a mark on the economy,” he said. “There’s plenty of personal hardship that people undergo, but the aggregate level of the economy generally doesn’t reflect much damage.”

About 800,000 federal workers are affected by the shutdown, and many will miss their first paychecks on Friday.

But a longer shutdown would start to cause damage to the economy.

Kevin Hassett, chairman of the White House Council of Economic Advisors, has estimated the partial shutdown will reduce the nation’s total economic output by about a tenth of a percentage point every two weeks. For context, the U.S. economy is forecast to have grown by about 2.8% in the fourth quarter of the year.

Mark Zandi, chief economist at Moody’s Analytics, has predicted that a partial shutdown that lasts through the end of this month would shave from one-tenth to two-tenths of a percentage point from total first-quarter economic growth.

The Fed, which is self-funded, is not affected by the partial shutdown. But one of the agencies that is, the Commerce Department, produces some important economic reports. The shutdown already has delayed the release of the monthly foreign trade statistics, which were due out on Tuesday.

If the shutdown lasts through this month, more key data on U.S. economic growth, consumer spending and personal income also will not be released.

Powell said that would be a problem for Fed officials as they tried to assess the state of the economy to decide on interest rate policy.

“We would have a less clear picture into the economy if it were to go on much longer,” said Powell.

The Fed chairman was otherwise mostly upbeat about the U.S. economy, saying “2018 was a very good year.”

“It’s the strongest growth we’ve had in more than a decade,” he added. “We see continued momentum from the data right through the beginning of this year.”

But given recent concerns about slowing global growth and trade tensions, Powell reiterated comments he made last week that Fed officials would be “patient” in deciding when to enact another increase in the central bank’s benchmark short-term interest rate.

The Fed raised the target range of the federal funds rate by 0.25 percentage point last month, the fourth such hike in 2018.

At their December meeting, Fed monetary policymakers estimated they would enact two more small hikes this year, but Powell said there was no set plan for additional rate hikes.

“The good thing is,” he said, “we’re in a place where we can be patient and flexible and wait and see what does evolve” with the economy.

Trump has publicly criticized Powell and the Fed for the recent rate hikes, something presidents rarely do. But Powell said he and his Fed colleagues “do not take political factors into consideration in our discussions.”

Asked about reports that Trump would like to meet with him, Powell said he had not received any invitation yet.

“Fed chairs do meet with presidents. I’m not aware of any Fed chair in my lifetime that hasn’t met with the president,” he said. “These meetings tend to be rare … and I’m not aware of any Fed chair turning down any invitation from the White House nor do I think that would be appropriate.”

jim.puzzanghera@latimes.com

Twitter: @JimPuzzanghera