Federal Reserve Chair Janet Yellen told Congress Wednesday that she expects economic growth to accelerate this year despite the anemic first quarter, but the recent housing market slowdown "could prove more protracted than currently expected."
She also repeatedly refused to provide even a broad time frame for the Fed's first increase in its benchmark short-term interest rate after her comments in March roiled financial markets.
The economy barely grew at all in the first quarter, expanding at a 0.1% annual rate, but Yellen at least partly blamed bad weather.
"Although real GDP growth is currently estimated to have paused in the first quarter of this year, I see that pause as mostly reflecting transitory factors, including the effects of the unusually cold and snowy winter weather," Yellen told the Joint Economic Committee.
Still, Yellen said: "Looking ahead, I expect that economic activity will expand at a somewhat faster pace this year than it did last year." The economy grew 2.6% in 2013.
But Yellen said housing activity has "remained disappointing so far this year and will bear watching." She added, "The recent flattening out in housing activity could prove more protracted than currently expected rather than resuming its earlier pace of recovery."
Her somewhat ominous cautionary note on the housing market could be significant, because the sector's recovery was expected to strengthen this year and help fuel a more rapid economic recovery. Instead, housing sales and new home construction have slowed dramatically, and economists say weather is only partly to blame. They cite rising prices and mortgage rates that have made homes less affordable, still-tight lending standards and low housing inventories.
Yellen identified housing as one of the two main risks to the Fed's generally positive outlook, along with "adverse developments abroad, such as geopolitical tensions or an intensification of financial stresses in emerging market economies." Such developments, she said, "could undermine confidence in the global economic recovery."
Yellen declined to be specific about when the Fed will begin to raise its benchmark short-term interest rate, now near zero, despite being pressed repeatedly by Rep. Kevin Brady, R-Texas, JEC chairman.
"There is no mechanical timetable or formula when that will occur," she said.
Most Fed policymakers project the Fed's first rate hike will occur sometime next year. Stocks dropped after Yellen suggested at a March news conference that the first rate increase could come in early 2015, and she appeared determined Wednesday to avoid hemming herself in to even a broad time frame. She said Fed policymakers project that the Fed will begin to raise the rate in 2015 or 2016.
A frustrated Brady assailed Yellen for refusing to be specific, recalling that Fed officials incorrectly assured lawmakers in the mid-2000s that the housing market was not poised for collapse and interest rates were at proper levels. "It just strikes me that this don't-worry-be-happy monetary policy is not working," he said.
Yellen also noted that the Fed is gradually reducing its government bond-buying as the economy and labor market have strengthened. The monthly bond purchases, aimed at lowering long-term interest rates and stimulating the economy, have been pared to $45 billion from $85 billion in December. Yellen said the purchases will likely be halted sometime in the fall, barring a "notable" change in the economic outlook.
Some Fed policymakers have voiced concerns that the benefits of the program have diminished since it began in September 2012, while the risks, such as creating bubbles that could burst in some markets, have grown. The purchases have driven many investors to high-risk assets, such as junk bonds and certain real estate investments.
Yellen said: "Some reach-for-yield behavior may be evident, for example, in the lower-rated corporate debt markets," suggesting that Fed officials are carefully monitoring the developments. She added that leveraged loans and high-yield bonds have "expanded briskly, spreads have continued to narrow, and underwriting standards have loosened further."
Yellen said the increased risks that investors are taking "appear modest to date — particularly at the largest banks and life insurers."
She added: "More generally, valuations for the equity market as a whole and other broad categories of assets, such as residential real estate, remain within historical norms."
Yellen also addressed concerns that several rounds of Fed bond-buying since the 2008 financial crisis have infused more than $3 trillion into the economy, possibly stoking eventual inflation that the Fed will be hard-pressed to tame.
"I do believe that we have the tools, as well as the the willingness and determination, to remove monetary accommodation at the appropriate time to avoid overshooting our (annual 2%) inflation objective," she said.
Yellen cited long-term unemployment as a lingering burden on the economy despite the rapid fall in the overall jobless rate to 6.3% from 8.1% in August 2012. About 35% of the unemployed have been out of work at least six months. While some economists fear many of those Americans will never work full-time again, Yellen said most should get jobs as the economy improves.
"I have no doubt that if growth in the economy picks up … then long-term unemployment will come down, too," she said.