‘Recessions Aren’t All the Same’: Treasury Secretary Yellen

U.S. Treasury Secretary Janet Yellen testifies before a Senate Finance Commmittee hearing on President Biden's 2023 budget, in Capitol Hill, Washington, on June 7, 2022. Evelyn Hockstein/Reuters

U.S. Treasury Secretary Janet Yellen insisted that not all recessions are alike and that it might be possible to bring down inflation while maintaining full employment.

The usual view that two quarters of negative growth indicates a recession “has typically worked,” Yellen said to reporters on June 21 when asked about how she would measure a recession, Reuters reported. “But recessions aren’t all the same … There are deep recessions. There are shallow recessions. There are recessions that have rapid recovery. There are recessions that might raise the unemployment rate slightly, but not a whole lot.”

Yellen thinks most economists are not predicting a recession since they are not taking into account the unique nature of a post-pandemic society with a depressed rate of labor force participation.

America is seeing a “very tight labor market,” with wages rising “pretty rapidly.” If people were to come back to the labor market, the tightness would ease and inflationary pressures may also calm down. The present economy must be viewed with these factors in mind, she said.

The treasury secretary had recently said that a U.S. recession is “not inevitable,” even though the U.S. Federal Reserve has been aggressively pushing up its benchmark interest rate in a bid to cool decades-high inflation. In June, the Fed raised interest rates by 75 basis points, the biggest such increase since 1994.

The 12-month inflation in May came in at 8.6 percent, the fastest increase since December 1981. While energy prices soared by 34.6 percent, food prices increased by 10.1 percent.

During his testimony in Congress on June 22, Fed Chair Jerome Powell said the central bank remains committed to keep raising interest rates until inflation cools down. Future rate hikes will depend on how quickly inflation comes down, he said while insisting that the American economy is in a position to withstand the shock of higher rates.

“Recent indicators suggest that real gross domestic product growth has picked up this quarter, with consumption spending remaining strong,” Powell said. When asked about the risk of recession, Powell said that though it is “not our intended outcome,” a recession is “certainly a possibility.”

Speaking to Bloomberg, Edward Yardeni, the chief investment strategist at Yardeni Research Inc., said that he calculates a 45 percent “subjective probability” of a recession during the next 18 months.

Multiple investment banks are also predicting the United States slipping into recession. JP Morgan calculates the chances of a U.S. recession at 85 percent. Wells Fargo is expecting a “mild recession” by the middle of 2023, triggered by rising interest rates. Bank of America is predicting a 40 percent chance of a U.S. recession in 2023.