Yellen cites housing, geopolitical tensions as economic risks

WASHINGTON — A slumping housing market and geopolitical tensions risk undermining the U.S. economy and bear close watching by the Federal Reserve, according to comments made by the central bank’s chief.

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.

Yellen:

“The recent flattening in housing activity could prove more protracted than currently expected.”

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.

Roberto Perli, a former Fed official and a partner at Cornerstone Macro:

“The only different language that I caught was her sentence that housing activity has remained disappointing so far this year and bears watching.”

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.

Yellen to lawmakers:

“Mortgage rate went up quite a lot over the spring and summer. 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 index trading up slightly in the early afternoon.

Prices for U.S. government debt rose, and futures markets showed traders pushing back their expectations for a first Fed rate hike to July 2015 to June 2015.

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 the 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 committee chairman Kevin Brady, refused to be pinned down on how quickly the Fed might move.

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 job 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 rate in over two years while the jobless rate hit a five-and-a-half 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 economic’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.

Yellen, pointing to lower-rated corporate debt markets as an example:

“Some reach-for-yield behavior may be evident.”

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.

Source: Reuters

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