Yellen Confident Fed Can Bring Inflation Down to 2 Percent Without Triggering Recession

Treasury Secretary Janet Yellen speaks at an event on the Biden administration’s economic strategy toward the Indo-Pacific in Washington, on Nov. 2, 2023. (Madalina Vasiliu/The Epoch Times)

Treasury Secretary Janet Yellen said Monday that she believes that the Federal Reserve’s high interest-rate policy will help bring inflation down to the central bank’s 2 percent target without triggering a recession.

Ms. Yellen made the remarks during an interview with Yahoo Finance on June 24, in which she said she believes inflation will fall to 2 percent “as we get into next year,” adding that economic growth may be cooling, but she doesn’t see grounds for a recession.

She said the economy is strong, the unemployment rate is low, and, despite some signs of weaker economic growth, she doesn’t “see the basis, really, for a recession in the outlook.”

Ms. Yellen declined to say when she thinks the Federal Reserve will cut rates, noting that central bank policymakers have said they want to see inflation on a stable downward trend before cutting.

“They certainly don’t want to cause a recession when it’s unnecessary—that’s the balancing act,” she said.

The Fed has held the benchmark interest rate within a range of 5.25–5.50 percent since last July in a bid to lower inflation. The latest data show that the Fed’s preferred inflation gauge, the so-called core Personal Consumption Expenditures (PCE) price index, fell to 2.8 percent in April, the lowest level since March 2021.

As inflation has been generally trending lower in recent months, markets have been betting that the Fed will cut interest rates, especially in light of some weaker labor market data and signs of cooling in consumer spending.

Markets are now pricing in two 0.25 percentage-point rate cuts this year—one at the policy-making meeting of the Federal Open Market Committee in September and the second in December, according to the CME Fed Watch Tool, which is a measure of investor expectations based on futures contracts. That means investors expect that by the end of the year, interest rates will be within a range of 4.75–5.0 percent.

Several Fed officials have said recently that they need to gain more confidence that inflation is, indeed, trending down before lowering interest rates.

Some, such as Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, and Federal Reserve Governor Michelle Bowman, have even said they’re prepared to raise rates if incoming data show inflation ticking up again.

Warning Signs

Expectations have been building for the Fed to cut rates in light of some softer economic data.

The Conference Board’s Leading Economic Index (LEI), which is a forward-looking gauge made up of 10 individual economic indicators, fell by 0.5 percent in May, following a 0.6 percent decline in April.

The drop was driven mostly by a decline in new orders, weak consumer sentiment about future business conditions, and lower building permits.

“While the index’s six-month growth rate remained firmly negative, the LEI doesn’t currently signal a recession,“ Justina Zabinska-La Monica, senior manager of business cycle indicators at The Conference Board, said in a June 21 statement. ”We project real GDP growth will slow further to under 1 percent (annualized) over the second quarter and third quarter 2024, as elevated inflation and high interest rates continue to weigh on consumer spending.”

Consumer spending accounts for roughly two-thirds of economic output and so is a key driver of the U.S. economy. There have been some warning signs for consumer spending in recent months, with retail sales—a proxy for consumer spending—rising a paltry 0.1 percent in May after falling 0.2 percent in April, according to data from the U.S. Census.

“With the pace of retail sales being at its weakest since the great recession, demand for air travel receding, and experience spending starting to show fatigue, the economy is at a tipping point,” economist David Rosenberg said in a post on X.

A recent report from consulting company McKinsey showed that consumer optimism fell in the second quarter of 2024.

The McKinsey report showed a rise in consumer intent to spend on essential items over the next three months, while consumers planned to reduce their spending on discretionary items.

A report from Deloitte at the end of May painted a similar picture. It showed that the company’s financial well-being index of consumers held steady in recent months, but future spending intentions “still point to robust consumer focus on saving instead of overspending.”

Elsewhere, Austan Goolsbee, president of the Federal Reserve Bank of Chicago, said recently that he sees several warning signs for the economy, including possible cooling in consumer spending.

During a June 24 interview on CNBC, he remarked that there are “a couple of warning signs” for the economy to take note of.

He singled out rising unemployment claims, increases in debt delinquency rates, and what seems to be cooling in consumer spending—all factors he said, that make it “worth wondering about where we are on our restrictiveness scale,” referring to interest rate levels.

Initial jobless claims, which measure the number of people filing for unemployment insurance for the first time, have been trending up in recent months.

Debt distress has also come into the spotlight, with an April report from the Federal Reserve Bank of Philadelphia showing that the share of credit card accounts with past due debt payments in the fourth quarter of 2023 reached all-time highs at every time horizon—30 days, 60 days, and 90 days.

Also, a report on consumer expectations from the Federal Reserve Bank of New York in April showed that concern among Americans about losing their jobs rose to its highest level since September 2020, a year marked by a deep pandemic-related recession.

The same report also showed that consumer worry about being able to make minimum debt payments rose to its highest level since the pandemic hit.