- The Washington Times - Wednesday, June 18, 2014

Federal Reserve Chair Janet Yellen was upbeat Wednesday about the prospects for stronger growth in the 3 percent range in the second half of the year after the economy took a rare dip in the first quarter.

At a press conference following a two-day meeting of the Fed’s rate-setting committee, Ms. Yellen said she expects growth to be above the 2 percent average in the months ahead as previously soft spots in the economy gather strength.

“There are reasons we should see faster growth,” she said, including low interest rates and easier credit conditions in most areas outside mortgages, an improving global economy, rising home and stock prices, and healthier consumer finances.

“I think all those things ought to be working to produce above-trend growth” in the months ahead, she said. The Fed is forecasting growth overall this year of only 2.2 percent, but partly that reflects an unusual contraction in the first quarter of between 1 percent and 2 percent that was caused in part by the unusually cold winter.

The economy’s faster growth should start to produce more rapid growth in wages, which have been rising at a tepid 2 percent pace for years and leaving consumers with little or no real gains after factoring in inflation, she said.

“We could see wages growing at a more rapid rate. If we fail to see that, frankly I would worry about downside risks to consumer spending,” which could further dampen the economic recovery, she said. Consumer spending drives about two-thirds of economic activity in the U.S.

Ms. Yellen made her remarks after the Fed, as expected, announced it would continue to pare back its extraordinary easing program started during the recession, cutting its purchases of Treasury and mortgage bonds by another $10 billion a month. Under the current schedule, the Fed is set to end the bond purchase program altogether in October.

The Fed’s upbeat assessment of the economy gave a lift to financial markets, with the Dow Jones industrial average ending the day up 98 points at 16,907.

“The path of tapering looks set, and even the contraction in the U.S. economy in the first quarter of the year was insufficient to change the Fed’s thinking,” said Joseph Lake, analyst at the Economist Intelligence Unit.

But while the Fed is more optimistic in the short term, it has revised down its forecasts for longer-term growth to reflect its belief that the average rate of economic growth in the U.S. has downshifted into the 2 percent range in recent years as a result of what Ms. Yellen called “damage” done during the recession.

The major reasons for that downshift in growth are lingering long-term unemployment and the weak growth of business investment in computers and other productivity-enhancing equipment during the recovery, in a departure from previous expansions, she said.

Without such investments, which enable workers to produce more efficiently, the economy will not be able to grow at the healthier 3 percent rates seen in previous expansions, she said. Although, she expressed hope that investment would start to pick up along with the rest of the economy later this year.

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