Yellen Says Fed More to Blame for Wider Trade Deficit Than China

(Bloomberg) -- Federal Reserve interest-rate hikes in response to fiscal stimulus are causing the U.S. trade deficit to widen, not unfair Chinese trade practices, former Fed Chair Janet Yellen said.

Higher interest rates in the U.S. relative to those elsewhere put upward pressure on the U.S. dollar exchange rate, and "this is part of why we may get a larger trade deficit," Yellen said Tuesday at a conference in Beijing. A stronger dollar tends to lead to higher imports and lower exports, weakening the trade balance.

The former Fed chief, whom U.S. President Donald Trump replaced with Jerome Powell earlier this year, said America's appetite for foreign goods is helping create the trade deficits.

"I do not see unfair trade practices in China, or anywhere in the world, as what is responsible for the U.S. trade deficit,” Yellen said, speaking via a video link. “The U.S. trade deficit reflects the fact that Americans spend more than we produce, and we import excess goods and services from the rest of the world to satisfy that demand."

Fed Hikes

Yellen predicted the U.S. central bank would raise rates three to four more times over the next year "to stabilize the unemployment rate," which she said has fallen below levels most economists see as sustainable. It was 3.7 percent in October.

"We have a country that was already operating at around full employment before the recent tax cuts took place, and additional spending has spurred expansionary fiscal policy," Yellen said. “That's pushed the economy to the point of perhaps overheating.”

"It's something that -- although the Fed was already on the path of rate increases -- leads to higher rate increases, more rate increases, than we would otherwise have, to offset that stimulus," she said.

The U.S. trade deficit with China widened to a record $33.6 billion on average in the 12 months through September, according to Commerce Department data. Trump this year has imposed tariffs on a wide range of Chinese exports to the U.S., in part with the stated aim of reducing that deficit.

Yellen also pointed to monetary easing by the People's Bank of China as a “homegrown factor” that is placing downward pressure on the yuan.

To contact Bloomberg News staff for this story: Matthew Boesler in Beijing at mboesler1@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Karl Lester M. Yap

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With assistance from Editorial Board