Treasury Secretary Janet Yellen does not think the “last mile” of returning inflation to the Federal Reserve’s 2 percent objective will be harder, noting that price pressures are “certainly meaningfully coming down.”
While speaking at the Wall Street Journal CEO Council Summit in Washington, D.C., on Dec. 12, Ms. Yellen asserted that there is no cause for concern that inflation will not eventually meet the U.S. central bank’s mandate and targets.
The annual inflation rate slowed to 3.1 percent in November, down from 3.2 percent in October, matching the consensus estimate. The core Consumer Price Index (CPI), which excludes the volatile energy and food components, was unchanged, at 4 percent. While this is considerably down from the June 2022 peak of 9.1 percent, economists note that the road to 2 percent continues to be a sluggish journey. In addition, cumulative inflation since 2021 has been north of 17 percent, adding to households’ financial strain.
Ms. Yellen stated that many facets of the U.S. economy are adding to America’s living costs, such as shelter costs.
According to the Bureau of Labor Statistics (BLS), the shelter index came in at an annualized rate of 6.5 percent and rose 0.4 percent monthly. Monthly mortgage payments are up 13 percent year over year, to $2,575, Redfin data show. The national median price for rent is about $2,000.
However, the current administration’s policies are working to ease many of these price pressures, Ms. Yellen stated.
“Now, the prices of new rentals have stabilized and that means that over time, shelter inflation will come down, bringing headline inflation down, but people are seeing increases in rental costs,” she said. “The Biden administration certainly understands that high prices, even if they’re no longer rising, are definitely a concern to Americans.”
On the broader economy, Ms. Yellen purported that the labor market remains strong despite signs that it is cooling. She added that wage gains have been climbing at a steady pace.
In November, the U.S. economy added a higher-than-expected 199,000 new jobs, and the unemployment rate fell to 3.7 percent. Average hourly earnings were unchanged at 4 percent, but real average hourly wages are still down roughly 3 percent since 2021.
The former head of the Federal Reserve argued that it is unnecessary to produce higher joblessness to eradicate inflation from the economy, noting that the country is enjoying “full employment.” Economists have long contended that to vanquish inflation the central bank needs to cool down the economy by raising interest rates. Consumers have proven to be resilient, even in a climate of above-trend inflation and higher borrowing costs. This, market observers say, could extend the Fed some more room to keep rates higher for longer than expected.
Budget Deficit Concerns
The Treasury Department will publish the November Monthly Budget Statement on Dec. 12. The Congressional Budget Office (CBO) projected that the U.S. government ran a $300 billion deficit, meaning the total shortfall in October and November is $383 billion. A 17 percent increase in outlays drove the budget gap last month, the CBO noted.The Treasury plans to issue approximately $1.8 trillion in government bonds over the next six months to help manage the deficits and handle higher interest payments. The Treasury will sell $21 billion in 30-year bonds during the Dec. 12 auction. It sold $37 billion in 10-year Treasurys and another $50 billion in three-year notes on Dec. 11. The events led to higher-than-expected yields and primary dealers buying a higher-than-average amount of supply.
Despite concerns about the federal government’s fiscal path and the weakening demand for Treasury securities, Ms. Yellen argued that the most reliable way to determine sustainability is to assess net real interest costs on the debt, which is the financing costs in inflation-adjusted terms.
“That has been quite, quite moderate and well within historical norms,” she said. “It is projected over time to rise somewhat, but still in our sort of last budget toward levels that are not worrisome.”
At the end of October, annualized interest payments on the U.S. government debt surpassed the $1 trillion mark, Bloomberg Intelligence estimates show.
“There will be further increases to Treasury coupon auctions and T-bills outstanding going forward,” Bloomberg Intelligence strategists Ira Jersey and Will Hoffman wrote in a research note. “Besides deficits of over $2 trillion in the foreseeable future, climbing maturities following the increase of issuance from March 2020 will also need to be refinanced.”
On the other hand, if interest rates remain higher for longer, then additional resources to service the debt could “result in some extra stress on the fiscal outlook,” Ms. Yellen added.
“The president has recognized that it’s necessary to take steps to reduce the deficit over time to have a more fiscally sustainable policy,” she explained. “And he’s proposed, in his last budget, $2.5 trillion of deficit reduction.”
According to the White House’s 2024 budget, the administration forecasts that cumulative deficits will be about $17 trillion over the next decade. The national debt is projected to top $43 trillion in this span.
Since February 2021, the national debt has surged by more than $7 trillion, to more than $33.8 trillion.
President Joe Biden has repeatedly claimed that he has cut the deficit by $1.7 trillion. However, the federal deficit was $1.7 trillion in fiscal year 2023.
