Yellen Says It’s Fed’s Job to Avoid Any Wage-Price Spiral

(Bloomberg) -- Treasury Secretary Janet Yellen said that it's the Federal Reserve's job to avert any wage-price spiral and that she understands the “reasoning” behind plans at the central bank to scale back its asset purchases.

Wage and price behavior will be the key signs to watch to detect whether the U.S. economy is “overheating,” Yellen said, speaking virtually on Thursday to a conference organized by Reuters.

Yellen said that she isn't currently seeing signs of any such cycle of wage gains spurring consumer prices and further increases in employment costs that then boost inflation. However, the labor market is tight, as measured by gauges including the historically high rate of people quitting their jobs, she said.

The Fed cannot affect the supply factors that have caused higher prices, Yellen also said. She also discussed the role of trade tariffs introduced during former President Donald Trump's administration.

“Tariffs do contribute to higher prices in the United States,” Yellen said. “The Trump tariffs that were put in place, some of them create problems without having any real strategic justification.”

U.S. Trade Representative Katherine Tai “has been working with the Chinese reviewing the Phase One trade agreement, and she's opened up a process in which firms can apply” to have tariffs lowered, in cases where the cost to Americans exceeds any benefits, Yellen said. “That could be helpful. Again, it's not a game changer.”

In a wide-ranging question-and-answer session, Yellen also said:

• The threat that the omicron variant poses to the economy is very uncertain at this point. Delta did have an unexpectedly large impact; the hope is that the effect of omicron is limited
• Yellen isn't currently planning a China trip. She noted that Beijing has strict Covid-19 protocols and that Chinese President Xi Jinping and other top officials haven't traveled abroad. Still, she said she is “open” to a China visit
• U.S. Trade Representative Tai is working on a number of outstanding issues with regard to China. Those include the country's exchange-rate practices, she said, without offering further details
• Questioned on the potential negative impact of Fed tightening for emerging markets, she noted the Fed has committed to communicating in advance any changes in policies, and that a strong U.S. economy -- which would be associated with Fed tightening -- is good for emerging markets and the world
• Further reforms are needed for Treasuries trading and for money-market funds following the severe disruptions in the spring of 2020 that required “massive” Fed intervention in financial markets
• There are both pros and cons to introducing a digital version of the dollar, and Yellen said she hasn't made her mind up on the issue. The Biden administration hasn't discussed it in any serious manner as yet, and there will need to be a consensus across Congress and the administration in order to proceed
• Asked whether she planned to serve as Treasury secretary for more than two years, Yellen said she has no plans to leave the role “anytime soon”

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