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/ Source: CNBC.com
By Jeff Cox, CNBC

The U.S. economy remains strong, but dangers are brewing ahead, Federal Reserve Chairman Jerome Powell told a Senate committee Tuesday.

In his semiannual testimony on the state of monetary policy, the central bank chief noted that he and other officials are watching the state of affairs closely and are prepared to adapt policy if warranted.

"While we view current economic conditions as healthy and the economic outlook as favorable, over the past few months we have seen some crosscurrents and conflicting signals," Powell said in his prepared remarks to the Senate Committee on Banking, Housing and Urban Affairs. "Financial markets became more volatile toward year-end, and financial conditions are now less supportive of growth than they were earlier last year."

China and Europe are particular areas of concern, and the Fed also is watching how Brexit negotiations and trade talks play out.

"We will carefully monitor these issues as they evolve," Powell said.

The Fed has been caught in a market crossfire over the past several months, triggered by worries that it was on a set policy path and would continue tightening even if conditions weakened. More recently, though, officials have been conveying a message of patience with the future policy path, including both the approach to interest rates and to reducing the bonds the Fed holds on its balance sheet.

In addition to policy, Powell also addressed several other economic issues, in particular the continued low levels of inflation, currently running below the Fed's 2 percent target, as well as weak productivity and public debt, which he said is "on an unsustainable path."

Among positive developments, he cited stronger wage growth, especially among lower earners, as well as increased labor force participation.

In response to a question from Sen. Jon Tester, D-Mont., about what would happen if the U.S. fails to pay off its debt, Powell said, "It's beyond even consideration. The idea that the U.S. would not honor all of its obligations and pay them when due is something that can't even be considered."

The debt limit would come back into effect March 2 should Congress not enact legislation allowing for more borrowing.

Even if the debt ceiling is not raised, it would not immediately mean that the U.S. couldn't pay its bills. The Treasury Department can use "extraordinary measures" to continue funding operations, a process that would last for several months.

However, every time the warring parties come close to hitting the ceiling, it raises the specter of the U.S. defaulting on its debts, which now total just over $22 trillion.

"I think it would be a very big deal not to pay all of our bills when and as due," Powell said. "That's something I think the U.S. government should always do."

Powell will speak to House of Representatives officials Wednesday.