The Journal. - Janet Yellen on Inflation and the U.S. Economy

Episode Date: December 12, 2023

Today, WSJ’s Chief Economics Correspondent Nick Timiraos sat down with Treasury Secretary Janet Yellen who said inflation is “meaningfully coming down” and the U.S. is on path to achieving a so-called soft landing. Further Reading: - Inflation Edges Lower, But Still Too High for the Fed  - How Inflation Can Keep Falling  Further Listening: - Inflation Is Down. Unemployment Is Low. Is This a Soft Landing?  - Why a Soft Landing for the Economy Could Be Hard  Learn more about your ad choices. Visit megaphone.fm/adchoices

High inflation is a problem that the government has been trying to solve for the past couple of years. The Fed embarked on its fastest monetary policy tightening campaign since the 1980s to tame inflation. President Biden called fighting inflation his top priority. in his top priority. Today, the Labor Department released the latest Consumer Price Index report, which showed that inflation is finally starting to slow down. But is the U.S. economy out of the woods?

That was a big question at the Wall Street Journal's annual CEO Council, held this week in Washington. And this morning, Chief Economics Correspondent Nick Timoros sat down with Treasury Secretary Janet Yellen. They talked about inflation, the resilience of the U.S. economy, and the future of trade with China.

Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Tuesday, December 12th. Coming up on the show, a conversation with Treasury Secretary Janet Yellen. Embrace the summer vibes with Summersby Hard Cider, We'll be right back. age. Please drink responsibly. Carlsberg Canada, Inc., Waterloo, Ontario. Great. Well, Secretary Yellen, thank you so much for joining us this morning. It's a pleasure to have you here. My pleasure. Thanks so much for the invitation. Let's start with the inflation report that just came out. Inflation has been much better behaved in the second half of the year. 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. Is inflation vanquished?

It's certainly meaningfully coming down. currently on why inflation shouldn't gradually decline to levels that are consistent with the Fed's mandate and targets. So supply chain issues that resulted from the pandemic and mismatches and disruption in labor markets both seem to be healing. matches and disruption in labor markets both seem to be healing. As that happens, inflation's moved down. So there's a view among the economics commentariat that I often hear that says 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%? I personally don't see any good reason to think that the last mile is going to be especially difficult. I think we have an economy that's roughly operating at full

employment, and it can continue to do so. I think people predicted that unemployment was going to have to rise considerably in order to get inflation down. But inflation expectations are an important element in the inflation process, and inflation expectations, well, recent data suggests they've come down, but I think that they've been well under control. And that's important because it means that there is no underlying inflation momentum that we would need a softer labor market to manage to bring down.

So I want to take a step back and take stock of what we've learned about inflation over the last two years. I know people will be writing their PhDs about this years from now, but I'm curious to get your preliminary assessment. What caused inflation to go up so much, and why has it fallen seemingly without any serious weakness in the economy so far? seemingly without any serious weakness in the economy so far? So I do think we don't know the answer to this at this point. And it's appropriate that there be some PhD theses and a lot of research papers on this. And there's going to be time in the years ahead.

But just looking at what's happened, I think there were very significant supply disturbances that were caused by the pandemic shortages. So these supply disruptions have gradually come down and, you know, I can't say exactly how much that's contributed to lower inflation. I think that's been a factor. You also had enormous disruption in the labor market with a very significant number of people laid off or losing their jobs who need to find new work. And I think that led to disruptions in the labor

market that are also gradually healing. In a way, the natural rate of unemployment, I believe, is coming down as people settle into new jobs. I mean, that's a very disruptive process. We saw not only desperation on the part of firms as the economy picked up and they were desperately trying to add to their workforce, but mismatch of workers and firms that led people to quit their jobs, look for other works, until they settled into a good match. So quits were unusually high and you're seeing quit rates come down again toward normal levels. So the labor market's normalizing and labor force participation has moved up certainly among adults. We've seen it move up to the highest levels in decades. And that's helping to ease inflationary pressures as well.

So you've said you see a soft landing as the most likely outcome for the economy. Do I have that right? 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. Because when I look back over history, soft landings are quite rare. In 2000 and 2007, there was a lot of optimism that the economy was slowing into a soft landing. Most recessions look like soft landings for a little while.

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? Well, I agree with you that it is an unusual thing to have happen. 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's no way for inflation to get back to normal without its entailing a period of high unemployment or recession. And a year ago, I think many economists were saying a recession was inevitable. But actually, I've never felt there was a solid intellectual basis for making such a prediction. Because the times when you've, in the United States, in a sense, needed a downturn to get inflation down, those were periods like after the oil shocks of the 70s,

when inflation expectations clearly had moved much higher. And inflation then becomes self-perpetuating. You have a wage price spiral that really the only way to bring inflation down is getting inflation expectations down. And that involves a period of high unemployment that pushes inflation down and shows people,

you were wrong, inflation's actually lower than you thought. That's a painful process. We didn't need that. And because inflation expectations had 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. Now of course there

were shocks along the way. Russia's invasion of Ukraine led to soaring food and energy prices that had that of course boosted inflation and had the potential to dislodge inflation expectations. So there have been many risks along the way, but we've managed to avoid the adverse real consequences of those risks. And I think we're on a soft landing path, which is highly desirable, of course. Secretary Yellen is cautiously optimistic about where the economy is headed. But some Americans aren't as hopeful. Why she thinks there's a disconnect is next. is next. a contractor, or a consultant. You can get customized coverage for your business. Contact a licensed TD Insurance advisor to learn more.

Need a great reason to get up in the morning? Well, what about two? Right now, get a small, organic Fairtrade coffee and a tasty bacon and egg or breakfast sandwich for only $5 at A&W's in Ontario. So I don't have to tell you this, but there's a disconnect right now. You see some of the surveys. People say they're very unhappy with the economy. They feel worse off than three years ago. But you look at these kind of headline numbers and you say, well, what's not to like

about low unemployment and inflation coming down? Why do you think there is this disconnect? And are you concerned about the fact that the administration's message around Bidenomics isn't landing? So I think we've been through a lot. The pandemic caused an enormous amount of disruption in people's lives. And we're still in the aftermath of what's been a serious shock. And we've had serious global shocks. And although prices are rising at a much slower pace than they were, inflation is substantially off its highs. The level of prices of some things that people buy

and are important to them are higher. A good example would be rents. Rents have gone up considerably. And the cost of, if you're in the market, to buy a new home at this point, with mortgage rates and house prices having increased. And I think a lot of young people who are in the market, want to start families, are renting, want to buy a house. And well, and we see shelter costs continue to rise. And that's an important aspect of their cost of living. But the Biden administration is doing all that it can and

taking steps I think are very meaningful to lower costs in areas where they can. An example would be capping insulin prices for seniors at $35. We now have prescription drug prices coming down. The Inflation Reduction Act, the energy initiatives in that, and the bipartisan infrastructure law will bring energy prices down over time. And so 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. Before we close, I want to ask you, you were in the APEC meetings in San Francisco last month in the meeting with Chinese leader Xi Jinping. What should be the goal of U.S. engagement with China

given so much of the frustration and maybe disappointment over the last 20 years? Is the U.S. doing enough to de-risk from China, in your view, and is there a danger of doing too much de-risking? risk from China in your view? And is there a danger of doing too much de-risking? So I see a three-part agenda with respect to China. The first is that we want to have a relationship that involves healthy competition, trade, investment that is broadly beneficial both to the United States and to China is good for businesses. China is a huge market and is good for American workers, creates jobs. So the Biden administration does not seek to decouple from China, but we do seek to de-risk. And that means we don't want to be overly dependent when it comes to key supply

chains on China. Instead, I've promoted an approach called friend-shoring, which involves diversifying our supply chains, and we're working with India, Vietnam, with Mexico, with Indonesia, with other countries to, you know, continue to get the benefits of international trade but to be less reliant on China. We also need a level playing field and the president in his meeting with Xi and I met a few days before that with my Chinese counterpart. China has practices that result in unfair trade, subsidies, intellectual property practices that create an unlevel playing field that we intend to address. That's plank one. field that we intend to address. That's plank one. Plank two, we're going to protect our national security and speak out about human rights. And there's no compromising about that, but we'll

try to make our approach as narrow, as targeted as we possibly can. And I'd say the recent rules that we put forward with respect to outbound investment where we do see some dangers of US firms investing in China are very narrowly targeted at advanced semiconductors, artificial intelligence, quantum computing and with real national security implications. And the third plank of the China policy is we need to cooperate to address global challenges. We have a responsibility to the world to do that. Two areas that are very important are climate change and debt, that there are a lot of countries

around the world are really suffering, especially with high interest rates, from unsustainable debt burdens. They need to restructure their debt, and we need to cooperate to do it. And China is one of the biggest lenders. So we need to work. This isn't a U.S.-China issue. It's a multilateral issue. But we are in regular conversations with our Chinese counterparts to try to make progress in these areas. And I feel encouraged by the signs that things are getting better. Thank you for that. We're nearly out of time. Maybe a quick lightning round here. You're just one of just two people who have been chair of the Fed and Treasury Secretary. What are the biggest differences between those two jobs? Well, supervision, of course, is an important

piece of the Fed's job. But with respect to the economy, it's focusing on constructing a monetary policy that best allows attainment of a price stability maximum employment mandate. The Treasury's jobs are very, very broad. are very, very broad. I've never been in a position where the responsibilities are so diverse. We have 1,000 people who work at Treasury who deal with sanctions and threats from terrorist financing, illicit finance. We have tax policy, international economic relations with a variety of countries,

represent the United States in the multilateral development banks, in the IMF, and on and on. So the range of responsibilities at Treasury is really enormous. Which job is better? They're both great. I'm a lucky person to have had either of them, and I'm very grateful for the opportunity. Well, on that note, we're very grateful to have had you join us this morning.

Thank you so much, Secretary Yellen. Thank you so much, Mark. Thank you, sir. Thank you so much, Mark. That's all for today, Tuesday, December 12th. The Journal is a co-production of Spotify and The Wall Street Journal. If you like our show, follow us wherever you get your podcasts. We're out every weekday afternoon.

Thanks for listening. See you tomorrow.