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Yellen: US Economy will Accelerate in 2014, but Housing Slowdown Troubling

H.S. Borji
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Yellen: US Economy will Accelerate in 2014, but Housing Slowdown Troubling

The US economy will accelerate faster in 2014, but the Federal Reserve is puzzled by the prolonged slowdown in the housing market, Fed Chair Janet Yellen said today at the Joint Economic Committee.

Yellen’s congressional testimony raised warning signs about the housing recovery, which was a key part of the economy’s resurgence last year. Housing activity has been under pressure since last summer, around the time when mortgage rates began rising. Mortgage rates, while still at historic lows, are higher than a year ago.

New home sales plunged 14.5 percent in March, while building permits – a gauge of residential construction intentions – fell 2.4 percent. The sale of previously-owned homes in March slid 0.2 percent to a 20-month low. Economists had expected these indicators to strengthen following the weather-induced slowdown that put a freeze on the housing sector over the winter.

Housing activity has “remained disappointing so far this year,” Yellen said in her testimony.

Yellen added the economy as a whole is expected to grow at a faster rate this year, which will continue to drive down the unemployment rate. The International Monetary Fund has benchmarked US growth at 2.8 percent this year.

“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 stated.

“Looking ahead, I expect that economic activity will expand at a somewhat faster pace this year than it did last year, that the unemployment rate will continue to decline gradually, and that inflation will begin to move up toward 2 percent,” she added.

The Commerce Department said last week the US economy stalled in the first quarter, growing at an annual rate of 0.1 percent. However, latest trade data show the US economy may have contracted slightly in the first quarter. Although the country’s trade deficit narrowed in March, it narrowed at a slower rate than government estimates. Combined with previous reports on inventories and construction, March trade data suggest gross domestic product contracted at a 0.5 percentage point annualized pace in the first quarter.

Yellen also noted the Federal Reserve is gradually reducing the pace of its record bond-buying program. Since December, the Fed has pared asset purchasing by $40 billion.

Yellen remained vague on interest rates, failing to specify a timetable for when the central bank will begin to raise its overnight rate. Following the March policy meetings Yellen said the central bank could introduce a rate hike around six months after the Fed wraps up its stimulus program, which is expected to occur this fall. Since then, however, Fed officials have backed off from giving any timetable for when a rate could materialize.

Following Yellen’s testimony the US dollar index was at 79.19, up 0.12 percent.

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