Yellen Sees Solid Growth, Possible ‘Soft Landing’ for U.S. Economy

(Bloomberg) -- U.S. Treasury Secretary Janet Yellen said she expects solid growth in the coming year, with a possible “soft landing” for the economy as the Federal Reserve moves to bring down inflation.

“I do believe we're going to see solid growth in the coming year,” Yellen said in an interview at a Wall Street Journal event Wednesday. “The Fed will need to be skillful and also lucky, but I believe it's a combination that is possible.”

A number of economists have predicted a recession in 2023 as the Fed ramps up interest rates -- including with a half-percentage-point hike anticipated later Wednesday. But Yellen said that “a soft landing is possible.”

The Treasury chief said that while consumer prices have surged, medium-term expectations for inflation haven't been so affected. That means this is a different type of inflation than that faced by former Fed Chair Paul Volcker, Yellen said. Volcker tightened monetary policy so aggressively in the early 1980s that it caused a sharp recession.

She acknowledged the global economy faced a number of risks emanating from Russia's invasion of Ukraine, particularly its effect on global prices of energy and food commodities.

Dollar Comments

Yellen separately warned the U.S. will likely take more “actions” against Russia if it keeps up its invasion of Ukraine, and will continue to consult with European allies on that front. She said there's evidence the current sanctions are working to undermine the Russian economy, but there are further steps that the U.S. can take.

The Treasury chief expressed no worries over the strengthening value of the U.S. dollar compared with other major currencies. The comments come as the Bloomberg Dollar Index trades around its strongest levels since the Covid-19 crisis struck in the spring of 2020. The gauge has appreciated about 10% over the past year, making imports cheaper and U.S. exports less competitive.

“I believe in a market-based value for the dollar,” Yellen said. The Fed is raising interest rates, she said, and that's attracting investors to higher-yielding U.S. securities. “In a way that's part of how a tighter monetary policy works.”

A rapidly widening U.S. trade gap caused one of the biggest hits to the country's gross domestic product from net exports in the postwar era last quarter. Yellen called the disappointing GDP data “peculiar” and “not really a good read on the underlying strength of the economy.”

Asset Valuations

Preliminary data released last week by the Commerce Department showed U.S. gross domestic product shrank at a 1.4% annual pace in the first three months of this year, the first drop since the second quarter of 2020. The decline was also affected by a slower buildup of inventories.

Yellen said a better measure of the economy's underlying momentum was found in real final sales to domestic purchasers. That rose at an annualized rate of 2.6% last quarter.

She also expressed little concern over financial stability. Asset valuations are high, including in the stock market, but, unlike before the financial crisis of 2008, banks are healthy and credit quality is “excellent,” she said.

Yellen continued to defend the American Rescue Plan, the Biden administration's $1.9 trillion aid package that is now seen by many economists as excessive and having contributed to the highest inflation rate in four decades. While it added to the demand and thus to price pressures, the Treasury secretary said it was “justified and appropriate at the time given the risks that the economy faced.”