* Sticks to Fed script on need for low rates
* Comments on housing and geopolitics break new ground
(Recasts; adds quotes from Yellen's testimony, analyst quote)
By Michael Flaherty
WASHINGTON, May 7 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
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
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
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
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)