Yellen cautiously optimistic about future growth

A week after the Federal Reserve’s Open Market Committee announced yet another reduction in their monetary stimulus, Fed chair Janet Yellen delivered an optimistic growth outlook before the congressional Joint Economic Committee Wednesday.

Yellen acknowledged the economy had “paused” during the first quarter of 2014, but blamed most of that on a cold winter. “With the harsh winter behind us, many recent indicators suggest that a rebound in spending and production is already underway,” Yellen said in her prepared remarks.

A weak labor market and inflation below the Fed’s 2 percent target, however, requires the Fed to continue their monetary stimulus program, Yellen said. But as long as the labor market improves, she expects to fully draw down asset purchases by the fall.

Although the unemployment rate has declined, Yellen said she’s concerned about such a “substantial” drop in the labor force participation rate. Last month, the share of the population either working or searching for a job fell to 62.8 percent — the lowest since 1978. A good part of that decline is demographic, she said, referring to the baby boomers dropping out of the labor force when they retire. But the weak state of the labor market is a factor in that decline, too, she said.

Yellen also outlined several risks to the recovery, namely the housing slowdown. Her comments, the Wall Street Journal points out, were more prominent than any other recent treatment of that sector by her Fed colleagues, and if housing is indeed a concern for the Fed, it’s possible they could hold interest rates lower for longer.

As for the Fed’s impact on financial stability, Yellen said she was aware of some investors taking on extra risk because of lower interest rates, but she defended the Fed’s policies, saying that valuations in equity markets “remain within historical norms.”