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Business News/ Economy / Janet Yellen on Why She Predicts a Soft Landing for the U.S. Economy
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Janet Yellen on Why She Predicts a Soft Landing for the U.S. Economy

wsj

The U.S. Treasury secretary acknowledges such an outcome would be rare, but says the data are clearly pointing in that direction.

Janet Yellen on Why She Predicts a Soft Landing for the U.S. EconomyPremium
Janet Yellen on Why She Predicts a Soft Landing for the U.S. Economy

It has been a matter of debate among economists for a while: Can the U.S. economy achieve a so-called soft landing, with inflation falling back to prepandemic levels without a deep economic slowdown?

U.S. Treasury Secretary Janet Yellen, a former chair of the Federal Reserve, is confident it can. She sat down with Wall Street Journal economics reporter Nick Timiraos at the WSJ CEO Council Summit in Washington to explain her views on that and more.

Edited excerpts follow:

The last mile

WSJ: Inflation has been much better behaved in the second half of the year. Headline inflation is down to 3.1% in November from 9.1% in June of last year. Core prices rose 0.3% last month from October, a 3.5% annualized rate. Is inflation vanquished?

YELLEN: It has certainly meaningfully come down. And I see no reason, on the path that we’re currently on, why inflation shouldn’t gradually decline to levels that are consistent with the Fed’s mandate and targets.

Supply-chain issues that resulted from the pandemic and mismatches and disruption in labor markets both seem to be healing, and as that happened, inflation has moved down. The labor market, while it remains very strong, is cooling some as job openings come down. The intensity of hiring is diminished some.

But we haven’t seen layoffs, and we have excellent job creation, and labor-force participation is increasing. At this point, with inflation down so much and wage increases continuing at a healthy pace, real wages are rising. Real average hourly earnings are up 1.4% over the past year.

WSJ: There is a view among the economics commentariat that the last mile of getting inflation down will be the hardest. What do you think? Could inflation be more persistent if the unemployment rate continues to run below 4% and wage growth runs above 4%?

YELLEN: I personally don’t see any good reason to think that the last mile is going to be especially difficult.

We have an economy that’s roughly operating at full employment, and it can continue to do so. People predicted that unemployment was going to have to rise considerably to get inflation down, but inflation expectations are an important element in the inflation process and recent data suggest they have come down. They have been well under control.

That’s important because it means that there is no underlying inflation momentum that we would need a softer labor market to manage.

WSJ: So on that point, over the last couple of years, the two big worries that you hear from economists are, “We’re going to have a wage-price spiral," or, “Inflation expectations are going to become un-anchored." Do we no longer need to be so worried about those things?

YELLEN: That’s low on my worry list. I don’t see any evidence that inflation has become ingrained, or that we have a wage-price spiral. Neither of those things seem to me to be problems that we’re dealing with.

A disconnect

WSJ: You’ve said you see a soft landing as the most likely outcome for the economy. Do I have that right?

YELLEN: Yes, in the sense that, to me, a soft landing is the economy continues to grow, the labor market remains strong, and inflation comes down. And I believe that’s the path we’re on.

WSJ: Soft landings are quite rare. What gives you confidence that this might be more like the episode in the mid-1990s than in the last two downturns, absent the Covid shock, where it looked like we were soft landing and then we had a hard landing?

YELLEN: I agree that it is an unusual thing to have happen. And it certainly takes skill on the part of the Fed to calibrate monetary policy properly. But if you just look at the data, it looks as though that’s the path we’re on.

So many economists were saying there is no way for inflation to get back to normal without a period of high unemployment or recession. And a year ago, many economists were saying a recession was inevitable.

But I’ve never felt there was a solid intellectual basis for making such a prediction. The times when the U.S. needed a downturn to get inflation down, those were periods like after the oil shocks of the 1970s when inflation expectations clearly had moved much higher.

When that happens, inflation becomes self-perpetuating. You have a wage-price spiral, and the only way to bring inflation down is to get inflation expectations down, which requires a period of high unemployment. That’s a painful process.

We didn’t need that. Because inflation expectations never meaningfully ratcheted up on a long-term basis, we just had to have the economy normalize and get the labor market back to a sort of full-employment state to bring inflation down.

WSJ: There is a disconnect right now. People say they’re very unhappy with the economy. They feel worse off than three years ago despite low unemployment and inflation coming down. Why do you think there is this disconnect?

YELLEN: We’ve been through a lot. The pandemic caused an enormous amount of disruption in people’s lives. We’ve also had serious global shocks. And although prices are rising at a much slower pace than they were, the prices of some things that are important to people are higher. Rents, for example, have gone up considerably, and if you’re in the market to buy a new home, mortgage rates and house prices having increased.

But the Biden administration is doing all that it can to lower costs in areas where it can.

An example would be capping insulin prices for seniors at $35. The energy initiatives in the Inflation Reduction Act and the bipartisan infrastructure law will bring energy prices down over time. The Biden administration certainly understands that high prices, even if they’re no longer rising, are definitely a concern to Americans. And we’re trying to take the steps we can to address these prices.

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