‘Low Gear’

The labor market “may keep the recovery in low gear for a while,” said Yellen, 63, a former Fed governor and top economic adviser under President Bill Clinton. Unemployment, a slowdown in wage growth and workers’ insecurity will “undoubtedly” restrain consumer spending and may result in “sluggish spending growth,” she said.

Employers cut payrolls by 216,000 in August, the smallest drop in a year, after a 276,000 drop in July, according to a Labor Department report this month. The jobless rate, at 9.7 percent, is the highest since June 1983, when it registered 10.1 percent.

Yellen said potential losses on commercial real estate loans at small and mid-size banks represent a possible “financial contagion” that’s one of the biggest threats to economic recovery. “The likelihood of continuing losses by financial institutions will add new fuel to the credit crunch,” Yellen said.

The housing market is showing early signs of a rebound. A Commerce Department report due Sept. 17 will show builders broke ground on 600,000 new homes last month at an annual rate, a 3.3 percent gain and the fastest pace since November, according to the median forecast in a Bloomberg News survey.