Treasury Secretary Janet Yellen gave a glass-half-full assessment of the US economy, acknowledging a slowdown that she called necessary to tame inflation while rejecting the notion the country had entered a recession.
“We do see a significant slowdown in growth,” Yellen said at a press conference on Thursday. But a true recession is a “broad-based weakening of the economy,” she said. “That is not what we’re seeing right now.”
She also remained optimistic when pressed on whether the Federal Reserve’s fight against inflation is bound to cause a serious uptick in the jobless rate, which still sits at 3.6%.
“I believe, there is a path to bring down inflation while maintaining a strong labor market,” she said. “That’s not a certainty that can be done, but I believe there is a path to accomplishing that.”
The Treasury chief repeatedly stressed the positive, pointing to continued job creation, strong household finances, gains in consumer spending and growth in business. Employment climbed by 1.1 million jobs in the second quarter, a sharp contrast with the average loss of 240,000 in the first three months of past recessions, she said.
The Treasury chief was speaking hours after data showed the US economy shrank for a second straight quarter, as higher interest rates slowed business investment and housing demand.
“We need to see a slowdown,” Yellen said. “The labor market is extremely tight, and may be the source of some inflationary pressure,” she said, while emphasizing the important contributions of food and energy costs, driven by war in Ukraine, and supply-chain bottlenecks to overall inflation across the globe.
Recession Debate
Thursday’s data fired up the debate over whether the US had slipped into a recession. While two straight quarters of economic contraction fit a broad definition of a “technical” recession, the White House has pushed back against that determination, citing job growth and consumer spending.
Bringing inflation down is a top priority for the administration, Yellen reiterated. Consumer-price gains are “likely to come down in the days ahead,” she added.
She also endorsed once again steps taken by the central bank. The Fed has dramatically shifted monetary policy this year, raising its benchmark interest rate by 2.25 percentage points since March. That includes a 75-basis-point hike on Wednesday, when Fed Chair Jerome Powell said that the path forward for vanquishing inflation and avoiding a recession was narrowing.
Yellen conceded that clouds were darkening the horizon, not only for the US but for the global economy, and that the strength of the US dollar, driven up by higher rates, was making life harder on many emerging markets.
“I am worried about the global outlook,” she said, pointing to repeated downgrades in the outlook for the global economy for this year and next by the International Monetary Fund. “A strong dollar creates for some of those countries pressures on their economies, especially when there’s dollar-denominated debt that becomes harder to pay off.”
She rejected the idea that global capital flows drawn to the US by higher interest rates had reached the point of a negative feedback loop, in which the flight of capital lowers the outlook for economic growth in developing countries, thus driving away more capital.
“I don’t see that occurring at this point,” she said.
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