Janet Yellen says the US can reduce inflation while maintaining a strong labour market

Janet Yellen believes the US can achieve a soft landing despite the recent banking sector scare. What leads her to this belief?

The recent banking sector outburst has not taken the US off course to achieve a soft landing, Treasury Secretary Janet Yellen said in an interview.

"I think there is a way to bring down inflation while keeping the labor market strong," Yellen said. "And the evidence I see suggests that we're already on the right path."

She added: "Are there risks? Of course there are risks. I don't want to underestimate the risks, but I think it's doable. "Yellen said the factors that have boosted inflation go far beyond the strains seen in the U.S. labor market, particularly Russia's war in Ukraine, which has driven up food and energy prices, and the disruption of supply chains during the pandemic that caused shortages of key materials and overwhelmed critical parts of the economy such as the auto industry.

"We are seeing the supply chain bottlenecks that have increased inflation start to loosen," she said.

There have been big changes in the way people live, low interest rates and property prices have risen significantly. Now house prices have basically stabilised.

"Yellen said she is seeing some easing of labor market tightness, including an increase in jobless claims, a decline in job openings and an increase in the employment rate. More slack in the labor market will help reduce inflation, but it doesn't necessarily mean a sharp rise in unemployment, she said.

"I think a strong labor market and lower inflation are compatible goals," she said.

U.S. economic data last week showed further signs of cooling in areas such as inflation and consumer spending. In addition, the collapse of Silicon Valley and Signature Bank last month sparked a crisis in the U.S. banking sector that rattled financial markets and raised uncertainty about the potential for negative domino effects in the broader economy. The Treasury Department, in conjunction with the Fed and the Federal Deposit Insurance Corporation, intervened after the failure of regional banks to ensure bank customers had access to all their money and avert future bank runs.

The actions taken by the Treasury, the Fed and the FDIC "stopped the systemic risk that existed," Yellen said.

Yellen said the U.S. economy is "in good shape" and highlighted the strong labor market, high savings and healthy balance sheets of households and businesses. Some form of economic downturn is inevitable to bring inflation down to the Federal Reserve's 2% target, but a recession would "not be necessary or required" to bring the Fed back to price stability, she said.

She said it's up to the Fed to "conduct its policy as skillfully as possible to achieve price stability with as little pain as possible." The Fed has raised its key interest rates four times this year as part of an aggressive campaign against inflation, which climbed to a more than 40-year high of 9.1% over the summer. But the central bank recently signaled it could soon slow the pace of interest rate increases as the economy cools and inflation falls slightly.

• What do you think? How will America, and especially the Fed, handle this? 🤔

Please note that this is not financial advice.