Janet Yellen Says Recession Isn't 'Inevitable' But Economy Likely To Slow

Economists have expressed concern that the Fed raising interest rates last week to reduce high inflation could trigger an economic decline.

Treasury Secretary Janet Yellen on Sunday said she expects the U.S. economy to slow as the federal government aggressively works to reduce inflation but that she doesn’t think a recession “is at all inevitable,” as some economists fear.

Yellen, speaking on ABC’s “This Week,” shared her optimistic take after the Federal Reserve raised interest rates Wednesday by three-quarters of a point, prompting concern that higher borrowing costs mixed with high inflation could trigger an economic decline.

Inflation is currently at a four-decade high, with consumer prices up 8.6% from where they were a year earlier, according to an inflation report for May. The interest rate hike aims to drop inflation to 2%.

“I expect the economy to slow,” Yellen said. “It’s been growing at a very rapid rate as the economy ― as the labor market has recovered and we have reached full employment. It’s natural now that we expect to transition to steady and stable growth. But I don’t think a recession is at all inevitable.”

Yellen acknowledged that inflation is “unacceptably high” but said it’s “likely to come down” in the months ahead. Having had high inflation during the first half of this year, she said, “locks in high inflation really for the entire year.”

Yellen pointed to Russia’s war on Ukraine for helping raise energy and food costs, as well as coronavirus lockdowns in China snarling supply chains. Those disruption came as U.S. consumer spending rebounded following the worst of the COVID-19 pandemic, creating more demand than supply. U.S. gas and fuel consumption is also lower than before the pandemic, she said, resulting in fuel production decline and higher prices.

“I think that producers were partly caught unaware of the strength of the recovery in the economy and weren’t ready to meet the needs of the economy. High prices should induce them to increase supplies over time,” she said.

Former Treasury Secretary Lawrence Summers, in a separate interview Sunday with NBC’s “Meet the “Press,” expressed a more ominous take on the nation’s economic future.

“The dominant probability would be that by the end of next year, we would be seeing a recession in the American economy,” he told host Chuck Todd.

Summers co-wrote a paper earlier this year that found that since 1955, the U.S. economy has gone into a recession within two years of the inflation average rising above 4% and unemployment falling below 5%. The U.S. unemployment rate is currently at 3.6%.

“I think all the precedents point towards a recession, Chuck. There’s always a first time for everything, and I don’t want ever to make forecasts with certainty,” he said.

Economists recently surveyed by The Wall Street Journal have also forecast a 44% chance of a recession occurring within the next 12 months. That’s up from a 28% chance in the next 12 months as of April and 18% back in January.

“We now believe the U.S. economy is headed for a mild recession in the coming months,” Greg Daco, chief economist for consulting firm EY-Parthenon, told the Journal. “While consumers will continue to spend freely on leisure, travel and hospitality over the summer, a persistently elevated inflation backdrop, surging interest rates and plunging stock prices will erode spending power, severely curtail housing activity and constrain business investment and hiring.”

Summers shared his view that cutting tariffs “is the right thing to do” to keep prices down. Like Yellen, he also encouraged congressional measures to reduce pharmaceutical costs, which he said would help health care and reduce inflation. He also endorsed a partial repeal of Trump-era tax cuts and freeing up fossil fuels in the short run. Still, he said he believes giving Americans a “gas tax holiday,” which some congressional leaders have suggested and Yellen said is “worth considering,” would be “kind of a gimmick.”

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