Yellen: Economy will grow faster in 2014

(USA TODAY) -- Federal Reserve Chair Janet Yellen will tell 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."

"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 will tell the Joint Economic Committee according to her prepared testimony.

The economy barely grew at all in the first quarter, expanding at a 0.1% annual rate.

Still, Yellen says: "Looking ahead, 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 says housing activity has "remained disappointing so far this year and will bear watching." She adds, "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 pick up steam this year and help fuel a more rapid 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 identifies 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 also notes 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 and are expected to be halted late this year.

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 says in her testimony: "Some reach-for-yield behavior may be evident, for example, in the lower-rated corporate debt markets."

She adds: "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."


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