By Judith Ugwumadu | 8 May 2014

Federal Reserve chair Janet Yellen is upbeat about the outlook of the US economy, saying yesterday in front of Congress that ‘many recent indicators suggest that a rebound in spending and production is already under way’ after a harsh winter slowed growth. 

Yellen said the overall economy is on track for solid growth in the current quarter, but warned that a recent flattening out in housing activity remained disappointing so far this year.

‘I expect that economic activity will expand at a somewhat faster pace this year that it did last year, that the unemployment rate will continue to decline gradually and that inflation will begin to move up toward 2%,’ she told Congress in a testimony.

Yellen also indicated that the pick-up in the labour market saw the unemployment rate reach 6.3% in April, compared to 6.7% recorded in March. However, this level was ‘still far from satisfactory’ she said.

‘A faster rate of economic growth this year should be supported by reduced restraint from change in fiscal policy, gains in household net worth from increases in home prices and equity values, a firming in foreign economic growth and further improvements in household and business confidence as the economy continues to strengthen,’ Yellen said. 

Moreover, US financial conditions remained supportive of growth in economic activity and employment, she added.

But she went on to mention how international chaos in emerging economies could affect US growth.

Yellen said: ‘One prominent risk is that adverse development abroad, such as heightened geopolitical tensions or an intensification of financial stresses in emerging economies, could undermine confidence in the global economic recovery.’

Last week, the central bank said it would slow down its quantitative easing program in May, trimming its monthly asset purchases by an additional $10bn to $45bn.

Yellen has also stated that if unemployment continued to fall, the Fed would likely reduce the pace of asset purchases further.

However, in an overview of her March comments yesterday, Yellen said: ‘With the unemployment rate nearing the threshold that has been laid out earlier, we undertook a significant review of our forward guidance.

‘While indicating that the new guidance did not represent a shift in the Fed’s Open Market Committee’s policy intensions, the committee laid out a fuller description of the framework that will guide its policy decisions going forward.’

She said the ‘new language’ explains that, as the economy expands further, the committee would continue to assess both the realised and expected progress toward its objective of maximum employment and 2% inflation.

But she also stressed that: ‘Even as the committee reduces the pace of its purchases of longer-term securities, it was still adding to its holdings.’

She said those holdings continue to put significant downward pressure on longer-term interest rates, support mortgage markets and contribute to favourable conditions in broader financial markets.