Yellen Says Biden’s Spending Bill Will Be Anti-Inflationary, Stands By ‘Transitory’ Inflation Narrative

Treasury Secretary Janet Yellen attends the House Financial Services Committee hearing in Washington, on Sept. 30, 2021. Al Drago/Pool via Reuters

Treasury Secretary Janet Yellen said Friday said she continues to see inflation as a temporary supply side-driven phenomenon that will normalize next year, and that President Joe Biden’s big spending package will actually have an anti-inflationary effect by smoothing some supply-side dislocations and footing the bill for some costs facing American families.

Yellen made the remarks in separate interviews on CNN, CNBC, and CBS in Rome, where she is attending the G-20 conference of global leaders.

“As demand shifts back to services and supply has a chance to adjust, I believe that price increases will normalize and we'll see lower monthly inflation rates, I think, by the second half of [2022],” Yellen told CNN in an interview.

With her remarks, she made clear she continues to stand by the “transitory” inflation narrative, even as a growing number of economists have challenged that framing on signs of sticky price pressures that are changing behavior in areas like future inflation expectations, as well as growing wage demands and the willingness of businesses to raise them to keep and attract workers.

One economist to raise the alarm and challenge the “transitory” inflation narrative is Queen’s College President and economist Mohamed El-Erian, who in an Oct. 25 op-ed in Bloomberg urged Fed policymakers and Biden administration officials to abandon the “transitory” framing and take decisive measures to rein in inflation—or risk serious consequences.

“The almost dogmatic adherence to a strict transitory line has given way in some places to notions of ‘extended transitory,’ ‘persistently transitory,’ and ‘rolling transitory’—compromise formulations that, unfortunately, lack analytical rigor given that the whole point of a transitory process is that it doesn’t last long enough to change behaviors,” he wrote.

El-Erian said he fears policymakers will double down on the transitory narrative rather than cast it aside, raising the probability of the central bank “having to slam on the monetary policy brakes down the road—the ‘handbrake turn.’”

“A delayed and partial response initially, followed by big catch-up tightening—would constitute the biggest monetary policy mistake in more than 40 years,” El-Erian argued, adding that it would “unnecessarily undermine America’s economic and financial well-being” while also sending “avoidable waves of instability throughout the global economy.”

Separately, Yellen told CNBC that the Biden administration’s sweeping domestic policy package, which includes investments in roads and bridges as well as a broad range of social programs and measures to fight climate change, would actually reduce inflationary pressures.

“It will boost the economy’s potential to grow, the economy’s supply potential, which tends to push inflation down, not up,” she told the outlet.

“For many American families experiencing inflation, seeing the prices of gas and other things that they buy rise, what this package will do is lower some of the most important costs, what they pay for health care, for child care. It’s anti-inflationary in that sense as well,” Yellen added.

In remarks to CBS, Yellen elaborated on why she believes provisions of the $1.75 trillion framework of Biden’s domestic policy package—a scaled-down version of the initial $3.5 trillion proposal—will have a disinflationary impact.

“It'll spur economic growth in our ability to supply goods and services,” she told CBS. “It will make it much easier for people to participate in the workforce by providing child care and support for people who work, and more supply also, is something that tends to push down prices throughout the economy.”

U.S. Treasury secretary Janet Yellen in Washington DC on September 30, 2021. Al Drago-Pool/Getty Images

Republicans have expressed opposition to Biden’s spending plans, calling the package a liberal wish list and arguing that it will add to inflationary pressures.

“The price tag of Democrats’ reckless tax-and-spend package may be lower, but the same socialist Green New Deal provisions remain,” Sen. Jim Risch (R-Idaho) wrote in a tweet.

“Soaring gas prices. Soaring heating bills. Democrats already have our nation on a path toward less energy independence and higher costs for working families,” Senate Minority Leader Mitch McConnell (R-Ky.) wrote in a tweet. “Their reckless taxing and spending spree would make it all dramatically worse.”

Senate Minority Leader Mitch McConnell (R-Ky.) speaks to reporters at the U.S. Capitol in Washington, on Sept. 21, 2021. Elizabeth Frantz/Reuters

Meanwhile, Federal Reserve chair Jerome Powell admitted last week that the factors driving inflation—particularly the supply chain crisis—have not subsided as quickly as policymakers expected.

“The risks are clearly now to longer and more persistent bottlenecks and thus to higher inflation,” he said at a virtual event hosted by the South Africa Reserve Bank. “We now see higher inflation and the bottlenecks lasting well into next year.”

Powell said that while the Fed will start rolling back its $120 billion-per-month bond-buying program that was one of the measures meant to boost economic recovery from the pandemic, but that he doesn’t expect to move faster on raising interest rates.

“I would say our policy is well-positioned to manage a range of plausible outcomes,” he said. “I do think it’s time to taper and I don’t think it’s time to raise rates.”

It comes as the Federal Open Market Committee (FOMC)—the Fed’s policy-setting body—will hold its next two-day meeting on Nov. 2 and 3.

The FOMC has signaled it would raise interest rates at some point in 2023 and begin tapering the Fed’s asset-buying program as early as November.