‘Certainly a risk’ of US recession, says Treasury Secretary Janet Yellen

WASHINGTON: The United States faces “a risk” of recession as its battle against inflation could slow the nation’s economy, but a serious downturn can still be avoided, Treasury Secretary Janet Yellen said on Sunday (Sep 11).

An American recession “is a risk when the Fed is tightening monetary policy to address inflation”, President Joe Biden’s leader on financial, economic and tax policy told CNN, referring to the US Federal Reserve.

“So it’s certainly a risk that we’re monitoring,” Yellen said, adding that the US has got a good strong labour market and that it’s possible to maintain it.

Faced with soaring inflation – it reached its highest level in 40 years in June at 9.1 per cent, before dipping slightly in July – the central bank is gradually raising its key rates in order to ease the pressure on consumer prices, while hoping the move does not derail the world’s largest economy.

Commercial banks use the Fed’s key rates to set the terms of the interest rates that they in turn offer their individual and corporate clients. Higher rates reduce consumption and investment.

The challenge for policymakers is to quell inflation before it becomes dangerously entrenched, but without sending the US economy into a recession that would reverberate around the globe.

“Inflation is way too high, and it’s essential that we bring it down,” Yellen said.

The Fed is aiming for a “soft landing” – bringing inflation back toward its goal of 2 per cent – without forcing a recession, a move which could cause unemployment to spike.

“I believe there is a path to accomplishing that,” Yellen said. “Over the longer run, we can’t have a strong labour market without inflation under control.”

While American GDP contracted in the first two quarters of 2022 – fitting the classic definition of a recession – Yellen again stressed that this was not the case.

“We’re not in a recession. The labour market is exceptionally strong … There are almost two job vacancies for every worker who’s looking for a job,” she stressed.

Jobs indeed remain tight, with a significant labour shortage.

Unemployment did tick up slightly in August, to 3.7 per cent, in part due to more people participating in the workforce – a sign that many workers left on the sidelines due to the COVID-19 pandemic are returning to the labour market.