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Yellen stays upbeat but is watching housing

Housing slowdown is a concern, Fed chief says

May 7, 2014

By Greg Robb, MarketWatch

WASHINGTON (MarketWatch) — The U.S. economy will end the year in better shape despite the slow start in the first quarter, but recent weakness in the housing market bears watching, Federal Reserve Chairwoman Janet Yellen said Wednesday.

“With the harsh winter behind us, many recent indicators suggest that a rebound in spending and production is already under way, putting the overall economy on track for solid growth in the current quarter,” Yellen said in testimony to the Joint Economic Committee of Congress.

Yellen said the weak first quarter growth rate was “mostly due to weather. She added she expects growth will expand at a “somewhat faster pace” this year than the 1.9% growth rate seen in 2013.

“The recent flattening out in housing activity could prove more protracted than currently expected rather than resuming its earlier pace of recovery,” Yellen said.

But Yellen said she continues to expect housing to pick up.

Yellen was clear about the central bank’s asset purchase program, saying that it would end in the fall if the economy stays on course.

When pressed how long the Fed would keep interest rates at zero once this program has ended, Yellen fought hard not to repeat her earlier comment that it might be “six months” after the end of asset purchases before the central bank started to hike interest rates.

“There is no mechanical timetable when [the first rate hike] will occur,” Yellen said.

Many Fed watchers agreed with Lauren Rosener, economist at BNP Paribas, who said Yellen’s testimony “had a slight dovish tilt.”

The stronger economy should be supported by less-tight fiscal policy, gains in household net worth from increases in home prices and stocks, a firming in foreign economic growth and strengthening confidence among consumers and businesses.

Yellen said that labor market conditions have improved but remain far from satisfactory.

The Fed chairwoman said given the slack in the economy, a high degree of monetary accommodation remains warranted.

She once again emphasized a flexible policy path that would respond to changes in the outlook.

On financial stability, Yellen said there is some evidence of “reach for yield behavior” in the corporate bond market, but said duration and credit risks to large banks and life insurers appear modest.

More generally, asset values remain within norms, she said.

The Fed doesn’t think the stock market is a bubble, the Fed chairwoman said.

There are pockets of potential “mis-valuations,” such as smaller-cap stocks, she noted.

“But overall…broad metrics don’t suggest we are in obviously bubble territory,” Yellen said.

The Fed doesn’t have a target for stock prices, Yellen added.

Yellen said the high inflation of the 1970s was a “formative experience” for officials now on the Fed and was not something they wanted to repeat.

The Fed has the tools, the will and determination to avoid an outbreak of inflation, she said.

Some of the factors holding down inflation “will probably be transitory,” she said.

Yellen said that the 0.1% real GDP growth rate in the first quarter was “mostly” due to transitory factors, including the unusually cold and snowy winter.

The Fed chairwoman noted that geopolitical risks and possible stresses in emerging market economies made her forecast uncertain.

She called rising inequality “very disturbing” and something that Washington policy-makers should focus on.

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