Fed Chair Powell says economy will make back most of shutdown effect

Saul Loeb | AFP | Getty Images

Federal Reserve Board Chairman Jerome Powell arrives to speak at a press conference after the Fed announced interest rates would remain unchanged, in Washington, DC, January 30, 2019.

Federal Reserve Chairman Jerome Powell said Wednesday afternoon that the American economy will recover most of the lost economic output lost during the federal government’s partial shutdown.

“I think important – probably less important now – has been the shutdown, which will leave some sort of imprint on first-quarter GDP,” Powell said during a press conference. “We don’t know the ultimate resolution of it. If that’s all there is and the shutdown is gone and there isn’t another shutdown, we’ll get most of [the lost growth] back in the second quarter.”

The nonpartisan Congressional Budget Office estimated in a report on Monday that the federal government closure cost the economy $11 billion, reflecting lost output from federal workers, delayed government spending and reduced demand. Further, the CBO estimated that $3 billion in economic activity was permanently lost after a quarter of the government was closed for nearly 35 days.

Powell later addressed a question about the effects a second shutdown could have on GDP if lawmakers fail to reach a breakthrough on border security as President Donald Trump has insisted.

“If there were going to be a permanent, or a lasting effect let’s say, it would be from a longer shutdown or perhaps a second shutdown. And that would be through the channel of a loss of confidence in our ability to make policy in the United States,” he said. “I think that was something we and many others were worried about as there was talk of an even longer shutdown. In terms of ideas for not having more shutdowns, I know Congress is actually looking at some of those. I think that could be a profitable thing to explore.”

The Federal Reserve said earlier Wednesday that it will be “patient” when making decisions about future monetary policy. The Fed also removed reference to “further gradual increases” to the federal funds rate in its statement, a signal some market participants took to mean that it may slow the pace of interest rate increases in 2019.

Powell first introduced that the Fed could have “patience” when he sat on a panel with former Fed chairs Ben Bernanke and Janet Yellen in early January, a soothing phrase for many market participants who took it as a sign that the Fed may be nearing the end of its gradual rate increases. The Fed increased rates four times in 2018.