Ms Yellen said the Fed’s otherwise optimistic outlook could be undermined if disappointing housing activity continued for the rest of the year.
Her remarks suggest the Fed still sees significant economic threats, despite encouraging data such as April’s jobs growth of 288,000, and will keep slowing its asset purchases at the modest pace of $10bn per meeting.
“Readings on housing activity – a sector that has been recovering since 2011 – have remained disappointing this year and will bear watching,” said Ms Yellen. “The recent flattening out in housing activity could prove more protracted than currently expected rather than resuming its earlier pace of recovery.”
New housing starts and existing home sales are both down on a year ago as higher interest rates, tight mortgage availability and slow income growth damp activity in a sector crucial to the broader recovery.
Ms Yellen’s testimony marks her first public comments since last week’s meeting of the Federal Open Market Committee, when the Fed slowed its asset purchases by another $10bn a month to $45bn, and sounded more positive on the economy.
The Fed chairwoman told the joint economic committee that “a rebound in spending and production is already under way”, after a cold winter left annualised first-quarter growth at just 0.1 per cent, with solid expansion expected in the second quarter.
Ms Yellen also warned of economic dangers from outside the US. “At present, one prominent risk is that adverse developments abroad, such as heightened geopolitical tensions or an intensification of financial stresses in emerging market economies, could undermine confidence in the global economic recovery,” she said.
She repeated her view that “conditions in the labour market have improved appreciably, [but] they are still far from satisfactory” – pointing to high levels of long-term unemployment, slow wage growth and the number of people working part-time who would like full-time jobs. Ms Yellen noted some risks to financial stability as investors chase yields but said increased risks for banks and insurers were “modest to date.” (FT)