Yellen sees strong growth and possible “soft landing” for the US economy

US Treasury Secretary Janet Yellen said she expects strong growth next year, with a possible “soft landing” for the economy as the Federal Reserve moves to reduce inflation.

“I think we’re going to see solid growth in the next year,” Yellen said in an interview at a Wall Street Journal event on Wednesday. “The Fed will have to be clever and also lucky, but I think it’s a possible combination.”

Several economists have forecast a recession in 2023 as the Fed raises interest rates, even with a half percentage point hike anticipated later on Wednesday. But Yellen said “a soft landing is possible.”

The Treasury chief said that while consumer prices have risen, medium-term inflation expectations have not been affected as much. That means this is a different kind of inflation than former Fed Chairman Paul Volcker is facing, Yellen said. Volcker tightened monetary policy so aggressively in the early 1980s that it caused a deep recession.

He acknowledged that the global economy faces a number of risks emanating from the Russian invasion of Ukraine, particularly its effect on global energy and food prices.

Comments in dollars

Yellen separately warned that the US will likely take further “action” against Russia if it goes ahead with its invasion of Ukraine, and will continue to consult with European allies on that front. She said there is evidence that the current sanctions are working to undermine the Russian economy, but there are more steps the United States can take.

The Treasury chief expressed no concern about the US dollar strengthening in value compared to other major currencies. The comments come as the Bloomberg Dollar Index is trading around its strongest levels since the Covid-19 crisis hit in the spring of 2020. The gauge has appreciated around 10% over the past year, making imports cheaper and US exports less competitive.

“I believe in a market value for the dollar,” Yellen said. The Fed is raising interest rates, she said, and that is drawing investors to higher-yielding US securities. “In a way, that’s part of how tighter monetary policy works.”

A rapidly widening US trade gap caused one of the biggest hits to the country’s gross domestic product due to net exports in the postwar era last quarter. Yellen called the disappointing GDP data “quirky” and “not really a good read on the underlying strength of the economy.”

Asset Valuations

Preliminary data released last week by the Commerce Department showed that US gross domestic product shrank at a 1.4% annual rate in the first three months of this year, the first drop since the second quarter. of 2020. The decline was also affected by a slower build of inventories

Yellen said a better measure of the economy’s underlying momentum was found in actual final sales to domestic buyers. That increased at an annualized rate of 2.6% last quarter.

He also expressed little concern about financial stability. Asset valuations are high, even in the stock market, but unlike before the 2008 financial crisis, banks are healthy and credit quality is “excellent,” he said.

Yellen went on to defend the American Bailout, the Biden administration’s $1.9 trillion aid package now seen as excessive by many economists and which contributed to the highest rate of inflation in four decades. While it added to demand and thus price pressures, the treasury secretary said he was “justified and appropriate at the time given the risks facing the economy.”

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