An American recession “is a risk when the Fed is tightening monetary policy to address inflation,” President Joe Biden’s leader on financial, economic and tax policy told CNN, referring to the US Federal Reserve.
“So it’s certainly a risk that we’re monitoring,” Yellen added, but “we’ve got a good strong labor market, and I believe it’s possible to maintain that.”
Faced with soaring inflation it reached its highest level in 40 years in June at 9.1 percent, before dipping slightly in July the central bank is gradually raising its key rates in order to ease the pressure on consumer prices, while hoping the move does not derail the world’s largest economy.
Commercial banks use the Fed’s key rates to set the terms of the interest rates that they in turn offer their individual and corporate clients. Higher rates reduce consumption and investment.
The challenge for policymakers is to quell inflation before it becomes dangerously entrenched, but without sending the US economy into a recession that would reverberate around the globe.
“Inflation is way too high, and it’s essential that we bring it down,” Yellen said.
The Fed is aiming for a “soft landing” bringing inflation back toward its goal of two percent without forcing a recession, a move which could cause unemployment to spike.
“I believe there is a path to accomplishing that,” Yellen said. “Over the longer run, we can’t have a strong labor market without inflation under control.”
While American GDP contracted in the first two quarters of 2022 fitting the classic definition of a recession Yellen again stressed that this was not the case.
“We’re not in a recession. The labor market is exceptionally strong…. There are almost two job vacancies for every worker who’s looking for a job,” she stressed.
Jobs indeed remain tight, with a significant labor shortage.
Unemployment did tick up slightly in August, to 3.7 percent, in part due to more people participating in the work force a sign that many workers left on the sidelines due to the Covid-19 pandemic are returning to the labor market.