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Fed's Brainard calls for watchful waiting' on rate moves

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Federal Reserve Governor Lael Brainard called Thursday for caution toward monetary policy as downside risks grow for the U.S. economy.

The central bank official said she's downgraded her outlook as dangers have grown both domestically and from abroad.

Lael Brainard, Federal Reserve Governor

"I see the appropriate posture as watchful waiting," Brainard said during a speech in Princeton, New Jersey. "I don't want to prejudge what kind of moves may be appropriate later in the year, but for now I think it's very important to gather more information on those cross-currents while we engage in watchful waiting."

Citing softness in spending and investment, Brainard said ongoing trade tensions, Brexit and economic weakness in China also pose challenges.

"While strong foreign growth provided tailwinds early last year, foreign growth projections have been revised down repeatedly more recently," she said. "The slowdown of foreign growth now appears to be more persistent than initially assumed, with growth likely running below potential for most of last year."

After hiking interest rates four times in 2018, Fed policymakers have assumed a "patient" stance toward future moves. Current projections indicate two more increases this year, though that could change when individual Federal Open Market Committee members update their projections later this month.

Markets also have been watching the Fed's intentions with the bonds it is holding on its $4 trillion balance sheet. The central bank has been steadily reducing the size of its portfolio, but recent indications are that the roll-off is near an end.

Brainard echoed comments from other officials that she expects the balance sheet reduction to come to a close by the end of 2019. The size of the balance sheet is tied to bank reserves, which likely will run considerably higher than had been the norm before the financial crisis.

"We have gathered information from market contacts and have surveyed banks to assess their demand for reserves," Brainard said. "I would want to see a healthy cushion on top of that to avoid unnecessary volatility and ensure that the federal funds rate will be largely insulated from daily swings in factors affecting reserves."

The balance sheet reached a peak of $4.5 trillion, the result of three rounds of bond buying during and after the financial crisis.

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