Facing Inflation in the US Banking Sector: Treasury Secretary Janet Yellen’s Exclusive Interview with Fareed Zakaria
Treasury SecretaryJanet Yellen told Fareed Zakaria in an exclusive interview Friday that the banking sector turmoil hasn’t stopped the US from achieving a soft landing.
There is an easing of stress in the labor market with increases in unemployment claims, declines in job openings, and a rise in labor force participation. The labor market gaining more slack will help bring inflation down, but it doesn’t mean there needs to be a significant jump in unemployment, she said.
Russia’s war in Ukraine and the impact of the P-8 supply chain disruptions have caused material shortages, causing inflation to go up beyond the tightness seen in the US labor market.
“We’re seeing those supply chain bottlenecks that boosted inflation, they’re beginning to resolve,” she said. “We had big shifts in the way people live and low interest rates, and housing prices rose a lot. The prices of housing have settled down.
Last month, the collapse of Silicon Valley Bank and Signature Bank triggered a crisis in the US banking sector, roiled financial markets and fueled uncertainty about the potential for negative ripple effects to spread throughout the broader economy.
Regional bank failures resulted in the Treasury and Federal Deposit Insurance Corporation intervening to ensure bank customers could access their money and prevent future bank runs.
“Americans should note that America has a safe, strong banking system,” she said. Our banking system is well capitalized and liquid and the problems a couple of banks faced are not a general problem in the banking system. To make sure that the savings of the depositors are safe, we took steps to ensure that they felt like they were in good hands, and these are the tools we can use again if there is a problem with a single bank or a couple of banks.
As a result of being more cautious in their operations, banks are likely to have less availability of credit. The Fed has noted that credit tightening can help in the effort to cool inflation.
Ukranian Expansion and the Fed’s Debt Crisis: The Implications for the American Economy and for the Rest of the World
The interview was held late in the week, near the end of a jam-packed week of meetings, public appearances and speeches for the Treasury Secretary in conjunction with the International Monetary Fund-World Bank Spring Meetings, where Ukraine was a key focus.
In an interview with Zakaria, Yellen said that Russia should pay for the damage caused in Ukranian, and talks are ongoing as to possible mechanisms to make that happen.
She said the global community expects Russia to bear that responsibility. “This is something we’re discussing with our partners, but there are legal constraints on what we can do with frozen Russian assets.”
“I just cannot believe that they would let such a major, major disaster happen,” Lagarde said, adding if a debt default did happen, it would have a “very, very negative impact” both in the US and around the world.
The US government is in a conflict of principles over the debt crisis. If Congress doesn’t address the debt ceiling, the US could potentially face its first-ever default as early as this summer or as late as the fall. There is a time when Lagarde said the higher interest of a nation needs to prevail.
The former International Monetary Fund managing director remained optimistic about the recovery of the global economy, despite the Federal Reserve indicating a mild recession later this year.
The war in Ukraine, banking sector instability and inflation in the US and Switzerland are some of the causes cited by Lagarde.
Lagarde was the former head of the International Monetary Fund. It now expects economic growth to slow from 3.4% in 2022 to 2.8% in 2023. It had thought growth would be 3.0% this year.
The organization said that the balance of risks has shifted to the downside as long as the financial sector is not stable.
The collapse of Silicon Valley Bank heightened fears of a credit crisis and economists predict more cautious lending by banks.
Lagarde’s comment on the aperiodic tension between the US and China in light of the U.S.-China dialogue
Regarding China, Lagarde said she hopes they can have a dialogue, although she understands the competition. She did not think that trade should become aggressive between China and the US.