Jan 9 (Reuters) - Janet Yellen, who is set to take over as head of the Federal Reserve next month, is "hopeful" that U.S. economic growth will accelerate in 2014 to 3 percent or more and persistently low inflation will move up toward the central bank's target, according to a Time magazine interview released Thursday.
"I think we'll see stronger growth this year," Yellen said in the interview, released online ahead of the Time edition's Jan. 20 publishing date. "Most of my colleagues on the Fed's policymaking committee and I are hopeful that the first digit (of GDP growth) could be 3 rather than 2."
U.S. gross domestic product growth has averaged 2.6 percent through the first three quarters of 2013, but appears to have gathered momentum in the second half the year. Third-quarter GDP growth was recently revised up to 4.1 percent, though it is not expected to have sustained that pace for the fourth quarter.
Yellen, who will succeed Fed Chairman Ben Bernanke on Feb. 1 and will be the first woman to hold the job, also said she believes that the persistently low level of inflation, a worry for policy-makers, will pick up.
"The recovery has been frustratingly slow, but we're making progress in getting people back to work, and I anticipate that inflation will move back toward our longer-run goal of 2 percent," she said.
The Fed's preferred measure of inflation is currently running at roughly half that pace -- just 1.1 percent on an annual basis -- and has been in a downtrend since the spring of 2012, the only time since the recession it has reached the target level.
Worryingly low inflation notwithstanding, Yellen stressed that her current top priority is to lower the U.S. unemployment rate, currently at 7 percent, to the longer-run range estimated by the Fed of between 5.2 percent and 5.8 percent. The Fed has pledged not to consider raising its benchmark interest rate until the unemployment rate has fallen to at least 6.5 percent.
The recovery in the housing market will also gather pace in 2014 and the fiscal policy headwinds that the Fed has cited persistently as a drag on growth will also ease, she told Time.
"I expect it (the housing market) to pick back up and I do expect a further recovery," she said.
Yellen's appointment to chair the Fed was confirmed by the U.S. Senate on Monday.
The primary challenge facing her is to manage the winding down of the Fed's massive stimulus program, under which it had been buying $85 billion of U.S. Treasury and mortgage-backed securities each month in a bid to keep interest rates low and spur spending and hiring. Last month the Fed, with Yellen's support, decided to begin scaling back those purchases, and it cut the targeted level to $75 billion this month.
The reduction of the Fed's presence as the biggest buyer of Treasuries risks a rise in interest rates, which could act as a brake on growth. Indeed, yields on benchmark U.S. 10-year Treasury notes have risen back to near 3 percent from around 2.85 percent before the Fed's Dec. 18 announcement.
Yellen defended the bond-buying program, known as quantitative easing, against criticism that it has primarily benefited the wealthy because of the boost it has given to prices of riskier assets, such as stocks.
By making safe assets such as Treasuries scarce, the Fed's program forced rising demand for a wide range of other assets, driving up their prices. The Standard & Poor's 500 index, for example, delivered a total return, including reinvested dividends, of 32.4 percent last year, its best year since 1997.
"You know, a lot of people say this (asset buying) is just helping rich people. But it's not true. Our policy is aimed at holding down long-term interest rates, which supports the recovery by encouraging spending," she said in the interview, conducted on the day the Senate confirmed her nomination. "And part of the (economic stimulus) comes through higher house and stock prices, which causes people with homes and stocks to spend more, which causes jobs to be created throughout the economy and income to go up throughout the economy."
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