Treasury Secretary Janet Yellen sees diminishing risk for the U.S. to fall into recession, and suggested that a slowdown in consumer spending may be the price to pay for finishing the campaign to contain inflation.
On the chance of a recession, Yellen said Thursday that “my odds of it, if anything, have gone down — because look at the resilience of the labor market, and inflation is coming down.”
“I’m not going to say it’s not a risk, because the Fed is tightening policy,” she said, alluding to the Federal Reserve’s 10 interest rate hikes since March 2022, with potentially more to come.
Her remarks contrasted with rising recession concerns across the Atlantic. Economic activity almost stalled in the euro area, based on data compiled by S&P Global published Friday. The reports sent global stocks down, while bonds surged as investors fled to safety amid heightened anxiety that aggressive central bank policy will tip economies there into a downturn.
In the U.S., business activity expanded in early June at the slowest pace in three months, held back by a deeper contraction at factories.
So far the U.S. economy has proved resilient. A May employment report showed job gains beating all economists’ forecasts. Home construction and retail sales for last month have also shown surprising resilience in the face of the Fed’s aggressive monetary tightening.
Spending slowdown
“We probably need to see some slowdown in spending in order to get inflation” under control, Yellen said in reference to consumption. The core measure of price increases, which strips out food and energy, “is quite high,” she said.
Last week’s consumer price index release showed that the core inflation rate for May rose 5.3% from 12 months earlier. Last year’s surge in housing costs, which is only incorporated into the Consumer Price Index with a delay, was to blame for some of that increase.
The headline rate was 4% for May, well down from the peak of 9.1% reached in June last year.
“Inflation has really come down a lot — and there’s more in the pipeline,” Yellen predicted, partly due to an expected adjustment in the housing market.
The 2% debate
As for a debate among some economists about whether the Fed ought to raise its inflation target from the 2% rate that was adopted during a time of weak growth and investment, Yellen indicated that such a discussion isn’t appropriate at a time when policymakers are battling to contain a price surge.
“We could have lovely debate for what the inflation target would be,” Yellen said. “But this is not the time for that debate.”
Fed Chair Jerome Powell has rejected the idea of entertaining a change to the 2% target — sentiment he reiterated before Congress this week.
Yellen was speaking in Paris on the sidelines of a summit organized by French President Emmanuel Macron on reforming global development-lending architecture — an issue that’s been a priority for the U.S. administration.
Bloomberg’s Christopher Condon contributed to this report.
