MarketWatch: Slowdown in lending could help Fed bring down inflation while maintaining a strong job market, Yellen says

The U.S. economy may still achieve a soft landing as a slowdown in lending does some of the Federal Reserve’s work in bringing down inflation, despite last month’s stress in the banking sector, Treasury Secretary Janet Yellen told CNN’s Fareed Zakaria in an exclusive interview Friday that will be broadcast on Sunday.

“I do think there’s a path to bring down inflation while maintaining what I think all of us would regard is a strong labor market,” Yellen said in the interview which will air at 10 a.m. Eastern on Sunday . “And the evidence that I’m seeing suggests we are on that path.”

“Banks are likely to become somewhat more cautious in this environment,” she said. “That does tend to lead to somewhat greater restriction in credit that could be a substitute for further interest-rate hikes that the Fed needs to make.”

“Are there risks? Of course. I don’t want to downplay the risks here, but I do think that’s possible, ” Yellen added.

Yellen said that the factors that have pushed up inflation go well beyond the tightness seen in the US labor market, notably Russia’s war in Ukraine which raised food and energy prices, and pandemic-era supply chain disruptions which caused shortages in key sectors such as the auto industry.

“We’re seeing those supply chain bottlenecks that boosted inflation, they’re beginning to resolve,” she said. “We had big shifts in the way people live and low interest rates, and housing prices rose a lot. Now, housing prices have essentially settled down.”

Yellen said she is seeing some easing of stress in the labor market, including increases in unemployment claims, declines in job openings, and upticks in labor force participation. The labor market gaining more slack will help bring inflation down, but it doesn’t mean there needs to be a significant jump in unemployment, she said.

“I think the strong labor market and bringing down inflation are compatible goals,” she said.

Last month, the collapse of Silicon Valley Bank and Signature Bank triggered a crisis in the US banking sector, created volatility in financial markets, and fueled concerns about the possibility of a credit crunch.

The Treasury, in conjunction with the Federal Reserve and the Federal Deposit Insurance Corporation, intervened after the regional bank failures to ensure bank customers could access all their money and to stave off future bank runs.

The actions taken by the Treasury, Fed and FDIC “stemmed the systemic threat that existed,” Yellen told Zakaria.

“We took steps to make sure that depositors feel that their savings are safe, and the tools that we used to do that are ones that we could and would use again if difficulties in a single bank or a couple of banks were to create a risk of contagion to the system.”

Banks are likely to be “somewhat more cautious” in their lending though as a result and Fed officials have noted that credit tightening could assist in efforts to cool inflation.

“I’m not seeing anything at this time that is dramatic enough or significant enough in my view to significantly change the outlook,” Yellen said. “I think the outlook remains one for moderate growth and a continued strong labor market with inflation coming down.”

source

(Visited 8 times, 1 visits today)