Yellen cites housing, geopolitical tensions as economic risks

WASHINGTON Wed May 7, 2014 7:00pm EDT

U.S. Federal Reserve chair Janet Yellen speaks to the Economic Club of New York in New York April 16, 2014. REUTERS/Brendan McDermid

U.S. Federal Reserve chair Janet Yellen speaks to the Economic Club of New York in New York April 16, 2014.

Credit: Reuters/Brendan McDermid

WASHINGTON (Reuters) - A slumping housing market and geopolitical tensions risk undermining the U.S. economy and bear close watching by the Federal Reserve, the central bank's chief said on Wednesday.

In testimony to Congress, Fed Chair Janet Yellen repeated her stance that the economy was still in need of lots of support given the "considerable slack" in the labor market.

While she offered few new clues on the direction of interest rates, Yellen broke ground in outlining the risks facing the economic recovery.

Her mention of geopolitical tensions as a "prominent risk" suggested the Fed was worried the Ukrainian conflict could weigh on the U.S. economy, while her assessment of housing signaled the sector's slowdown was also a gnawing concern.

"The recent flattening in housing activity could prove more protracted than currently expected," Yellen cautioned.

In general, her testimony to the Joint Economic Committee underscored the Fed's commitment to keeping benchmark overnight interest rates near zero for some time to come.

"The only different language that I caught was her sentence that housing activity has remained disappointing so far this year and bears watching," said Roberto Perli, a former Fed official and a partner at Cornerstone Macro.

In the two statements the Fed's policy-setting panel has issued since Yellen took the central bank's helm in February, it has taken note of the slow housing recovery. On Wednesday, Yellen offered greater detail.

"Mortgage rates went up quite a lot over the spring and summer," she told the lawmakers. "They are still quite low by historical standards, so in that sense housing remains affordable, and I expect housing to pick up."

"But ... a recovery that seemed to be in progress really has now flattened out."

EYE ON JOBS MARKET

Financial market reaction to the testimony was relatively muted, with the S&P 500 stocks index trading up slightly in early afternoon.

Prices for U.S. government debt rose, and futures markets showed traders pushed back their expectations for a first Fed rate hike to July 2015 from June 2015. That is in keeping with a Reuters poll of big bond dealers released on Tuesday that showed more than half do not expect a rate hike until the middle of next year or later.

A week ago, the Fed reduced its monthly bond purchases to $45 billion from $55 billion, keeping the stimulus program on a path to be fully wound down by year end. But it also stuck to its assessment that the economy would need near-zero interest rates for a "considerable time" after the asset purchases end.

Yellen stuck with that message, and in a back-and-forth with the committee's chairman, Republican Representative Kevin Brady, refused to be pinned down on how quickly the Fed might move.

She said she expected the economy to expand "somewhat" faster than last year and repeated her view that inflation persistently below 2 percent poses a risk to the country's economic performance.

Even as she took note of "appreciable" improvements in the jobs market, Yellen said a high rate of long-term unemployment and a slow rise in worker pay suggested plenty of room for further job gains.

In April, U.S. employers hired workers at the fastest clip in more than two years while the jobless rate hit a 5-1/2 year low of 6.3 percent. The drop in unemployment, however, reflected Americans giving up the hunt for work, extending a trend that has been an unfortunate hallmark of the economy's recovery.

Yellen expressed faith that at least part of the decline in labor force participation could be reversed. She also said she had very little doubt that the share of Americans working part-time because they could not find full time work would come down.

Touching on financial stability, she said the Fed was aware that the extended period of low rates could fuel potentially risky investment behavior.

"Some reach-for-yield behavior may be evident," Yellen said, pointing to lower-rated corporate debt markets as an example.

She noted that issuance of syndicated leverage loans and high-yield bonds had expanded, while underwriting standards had loosened, though she said the increase risk-taking appeared modest - particularly at large banks and life insurers.

Yellen added that equity market valuations as a whole and residential real estate prices were within historical norms.

(Additional reporting by Jonathan Spicer and Richard Leong in New York, and Ann Saphir in San Francisco; Editing by Paul Simao, Tim Ahmann and Chizu Nomiyama)

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Comments (28)
earnst wrote:
I believe they have a very good understanding of just what they are accomplishing. More’s the pity.

May 07, 2014 10:42am EDT  --  Report as abuse
John1980 wrote:
Ah yes, the Almighty, Great and Powerful Fed Chair has spoken. The stock market better listen. The economy does not matter, only how much the Fed prints and how long they keep interest rates at 0%. Screwing the conservative saver 5 years running.

May 07, 2014 10:45am EDT  --  Report as abuse
Fiddlehead wrote:
Slow unemployment? Why, then, are foreign refugees coming in to our
country with no skills, nothing to offer our country, and living off
the taxpayer dole? Why?

With our high unemployment it is unbelievable that we would be
bringing foreign refugees – or allowing the aide companies like
catholic charities and lutheran services – anti-American groups -
to flood our country with foreigners who are here to take and
not give. They are taking American jobs at low wages and
Washington is doing nothing about it.

Ask Rep Betty McCollum from MN why there are over 3,000 foreign
refugees in her district. Ask her – Congress votes on these
issues and is responsible for the approved influx. Ask her why
the doors are not closed and why they are here living off of hard-
working American taxpayers.

We have Americans and Veterans in need of assistance, and they
get nothing. But, these foreigners here for hand-outs get everything
they want, including: Head Start for their children. Yes folks,
there are foreign refugees minors who are in our Head Start program.
Ready to revolt?

It is time. Perhaps a taxpayer revolt – stop paying taxes until
Congress gets it together. It has worked in the past.

May 07, 2014 11:02am EDT  --  Report as abuse
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