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U.S. economy “not out of the woods,” says former Fed vice chair

Aaron Task
Daily Ticker

When U.S. first-quarter GDP numbers are reported next week, economists aren't expecting much, with estimates ranging from 1% to 1.5%. Update: A sharp drop in March new homes sales Wednesday morning prompted greater concern about first-quarter growth; in reaction, Goldman Sachs downgraded its Q1 GDP forecast to 1.4% from 1.9%.

But the consensus is for a big rebound in the rest of the year, with estimates of 3% for the second quarter and 2.7% for the full year, according to a Bloomberg survey. That's consistent with the "central tendency" of Federal Reserve board members, who are expecting a 2.8% to 3% growth rate for all of 2014.

But one former Fed official isn't so sure.

"I certainly think there's going to be a rebound from the first quarter [but] to make a 3% year...we've got to do a lot better than 3% in the remaining three quarters and I"m just not quite that optimistic," says Princeton professor and former Fed Vice Chair Alan Blinder. "I just don't see where the growth is going to come from."

Related: "Sticking out like a sore thumb": Alan Blinder wants to reform the ratings agencies

American consumers are "doing fine" but unlikely to provide a big boost to growth, Blinder says. Meanwhile, fiscal policy may be less of a drag in 2014 vs. 2013 -- but it will still be a drag, he notes.

And if the growth isn't a strong as expected, expectations for the Fed to accelerate its tapering program or (gasp) actually tighten monetary policy are likely to prove premature, yet again.

"The hawks on the Fed...would certainly like to see that outcome but I don't think the hawks are in control and that's a good thing," Blinder says. "We're still not out of the woods."

Based on that, Blinder says Fed Chair Janet Yellen is doing the right things by continuing Ben Bernanke's policies and reiterating the flexibility of monetary policy. "The path of the economy is uncertain and effective monetary policy must respond to unexpected twists and turns the economy may take," Yellen said in a speech last week at the Economic Club of New York.

Related: Fed Chair Yellen signals she is less concerned about this economic threat: FT Alphaville's Garcia

For the new Fed chair, the big test will come this fall when the tapering process is currently scheduled to end. Then the question becomes "what's the Fed going to do next?" Blinder says. "That's when Janet Yellen will get her first test."

Aaron Task is the host of The Daily Ticker and Editor-in-Chief of Yahoo Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com.

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