Remarks on Housing from Janet Yellen, New Federal Reserve Chairman

In spite of rising mortgage rates housing has “good fundamentals” and is expected to continue to improve – that is the remark from the new Federal Reserve chairman.

After a little more than a week in her role as the fifteenth, and first female, Chair of the Board of Governors of the Federal Reserve, Janet Yellen testified to the House Committee on Financial Services Tuesday in a lengthy, 6-hour long session punctuated by a few recesses.  The major takeaways of her testimony are (1) that monetary policy will continue on its current path of a gradual reduction in quantitative easing as long as there is no notable change in the economic outlook, (2) the current outlook is for continued economic improvement, and (3) the Fed will monitor the outlook and adjust the path of monetary policy in line with expectations.

This means that as long as the economy continues to improve, we can expect continued tapering and gradual upward movement in mortgage and other interest rates with minor fluctuations up or down.  However, if the outlook for the economy improves notably, as happened last summer, mortgage rates could spike up more suddenly.  If the outlook for the economy were to deteriorate substantially, the Fed would likely alter its course expected course of tapering and tightening.

As a key interest rate sensitive sector of the economy, housing was mentioned throughout the testimony and question and answer period.

More detail from the Written Testimony:

Policy Continuity
In her written testimony, Yellen confirmed much of what many analysts expected, that she anticipates a great deal of continuity of Bernanke’s legacy regarding the openness and communication of the Fed[1] and monetary policy[2] since she was involved as Vice Chair when much of the current policy was shaped.

Economic Outlook and Housing
As far as the economic outlook is concerned, Yellen noted that growth largely picked up in the second half of 2013 with the slowing recovery in the housing sector in response to somewhat higher mortgage rates being an exception.

Quantitative Easing and Housing
In reviewing the benefits of the Fed’s quantitative easing program, Yellen noted that rising house prices have brought buyers out from underwater situations, increased security for households, and boosted the economy with the wealth effect—as household wealth improves, households spend some of their new wealth.

Question and Answers on:

Policy Continuity and the Fed’s Dual Mandate
In the question and answer session, Yellen reiterated some of the themes in the written testimony, again saying that the Committee will be outlook driven in making decisions regarding the future course of monetary policy.  In response to a question about the Fed’s mandate for full employment, Yellen acknowledged the importance of looking at broader measures of unemployment, such as the number of long-term unemployed and those employed part time for economic reasons, when considering labor market including.

Recent Economic Data and the Course of the Taper
Regarding recent economic news, Yellen admitted that she was surprised by the reported pace of job creation in December and January, but noted that weather and other factors could be affecting the data.  She insisted that more data would be needed to determine whether this should affect the economic outlook since monthly data is variable. In response to a question about what might cause the Fed to slow or pause the current tapering, Yellen answered that a notable change in the economic outlook would be needed.

The Housing Market
Regarding housing, Yellen mentioned that she believed that the spike in mortgage rates in Spring/Summer 2013 was due to a reevaluation in strength of the economy (i.e. it was better than most had previously thought).  Yellen said that she is hopeful that housing will continue to support the recovery as there are “good fundamentals,” and the recent slowing in housing market growth was a good sign that mortgage rates do have an effect on activity.

[1] “First, let me acknowledge the important contributions of Chairman Bernanke. His leadership helped make our economy and financial system stronger and ensured that the Federal Reserve is transparent and accountable. I pledge to continue that work.”  Chair Janet L. Yellen.  Semiannual Monetary Policy Report to the Congress. Before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C.  February 11, 2014.

[2] “Turning to monetary policy, let me emphasize that I expect a great deal of continuity in the FOMC’s approach to monetary policy. I served on the Committee as we formulated our current policy strategy and I strongly support that strategy, which is designed to fulfill the Federal Reserve’s statutory mandate of maximum employment and price stability.” Chair Janet L. Yellen.  Semiannual Monetary Policy Report to the Congress. Before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C.  February 11, 2014.

Danielle Hale, Director of Housing Statistics

As a Research Economist at NAR, Danielle studies tax issues, the wealth impact of home ownership, and different measures of home prices.

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