Yellen says Fed can tame inflation without crushing labor market
Yellen: US can have 'strong labor market' without such high inflation
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Hugh Johnson Advisors chief economist Hugh Johnson and Meridian Equity Partners senior managing partner Jonathan Corpina discuss how investors should play Fed rate hikes on "The Claman Countdown."
Treasury Secretary Janet Yellen expressed confidence on Thursday that the Federal Reserve can wrestle inflation under control without crushing the U.S. labor market, despite growing concerns about the economic outlook.
"I believe there is a path through this that can succeed in bringing down inflation while also maintaining a strong labor market," Yellen said at the Atlantic Festival in Washington. "And I very much hope that the Fed will be able to succeed in doing that."
Yellen made the comments one day after the Fed unanimously voted to lift the benchmark federal funds rate by 75 basis points for the third consecutive time as it tries to tame the hottest inflation in 40 years.
Although there are growing concerns that the central bank will tip the economy into a recession with higher rates, the former Fed chief said she believes the labor market will remain strong and that the unemployment rate will stay near a historic low.
FEDERAL RESERVE RAISES INTEREST RATES BY 75 BASIS POINTS FOR THIRD STRAIGHT MONTH
Treasury Secretary Janet Yellen testifies before the House Ways and Means Committee on Capitol Hill on June 8, 2022. (AP Photo/Jose Luis Magana, File / AP Newsroom)
"Right now, we have two job openings for every unemployed worker," she said. "And I think that's putting inflationary pressure into the system. But we can still have a good, strong labor market without quite so much pressure on wages."
Still, those comments seemingly put her in contrast with Fed Chairman Jerome Powell, who seemed to abandon the promise of a "soft landing" — the sweet spot between curtailing inflation without crippling growth — on Wednesday.
Speaking to reporters in Washington after the Fed's meeting, Powell conceded that a recession is possible and that securing a soft landing will be "very challenging," though he cautioned that no one knows if the tightening campaign will lead to a downturn and, if so, how significant it will be.
"The chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive or restrictive for longer," he said. "Nonetheless, we’re committed to getting inflation back down to 2%. We think a failure to restore price stability would mean far greater pain."
Jerome Powell, chairman of the U.S. Federal Reserve, speaks during a news conference in Washington on May 4, 2022. (Al Drago/Bloomberg via Getty Images / Getty Images)
In addition to the large rate hike, Fed officials laid out an aggressive path of rate increases for the remainder of the year. New economic projections released after the two-day meeting show policymakers expect interest rates to hit 4.4% by the end of the year, suggesting that another three-quarter percentage point increase is on the table.
The updated forecasts also showed unemployment climbing to 4.4% by the end of next year, up from the current rate of 3.7%. That's significantly higher than June, when policymakers saw the jobless rate inching up to 3.7%. Estimates for economic growth, meanwhile, were marked down to 1.2% in 2023 and 1.7% in 2024.
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"We have got to get inflation behind us," Powell said. "I wish there were a painless way to do that. There isn’t."
Economists widely agree the risks of a recession climbed considerably this year and that avoiding a downturn in the near future will be increasingly difficult as the Fed tightens monetary policy.