The Treasury Department of State Addresses Inflationary Problems in the U.S. Banks and Supply Chains: A Memorandum
The turmoil within the banking sector did not push America off course for a soft landing, the Treasury Secretary said in an exclusive interview.
There has been an easing of stress in the labor market with increases in unemployment claims, declines in job openings and an increase 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.
Yellen cited that the factors that have pushed up inflation go well beyond the tightness seen in the US labor market, notably Russia’s war in Ukraine, which raised food and energy prices; and pandemic-era supply chain disruptions, which caused key material shortages that gummed up critical pieces of the economy, such as the auto industry.
She said that the supply chain bottlenecks that boosted inflation are coming to an end. “We had big shifts in the way people live and low interest rates, and housing prices rose a lot. Housing prices have settled down.
The collapse of Silicon Valley Bank and Signature Bank shook financial markets and created uncertainty about the impact on the rest of the economy.
The Treasury, in conjunction with the Federal Reserve and the Federal Deposit Insurance Corporation, rushed in to shore up the regional banks so they wouldn’t collapse and cause more 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 that a couple of banks faced — this is not a general problem throughout the banking system. We took steps to make sure that depositors feel that their savings are safe, and the tools that we used to do that are ones that we could and would use again if difficulties in a single bank or a couple of banks were to create a risk of contagion to the system.”
Banks could reduce credit availability due to being more cautious in their operations. Credit tightening may be able to assist in the effort to cool inflation.
An Interview with Yellen Zakaria: The US Debt Crisis is Going Through a Critical Recession, and the Economic Outlook as a Function of the Recovery Plan
Yellen’s interview with Zakaria came near the tail end of a jam-packed week of meetings, public appearances and speeches for the Treasury Secretary in conjunction with the IMF-World Bank Spring Meetings, where Ukraine was a key focus.
In an interview with Zakaria, Yellen said that Russia should pay for the damage it caused in Ukranian, and that talks are ongoing as to possible mechanisms to make that happen.
She believed that the global community expected 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.”
Christine Lagarde, president of the European Central Bank, said she has “huge confidence” the US will not allow the country to default on its own debt during an interview on CBS’ “Face the Nation” Sunday.
There is a partisan standoff between the Republican and Democratic government regarding the debt crisis. The US could face its first default as early as this summer if Congress doesn’t raise the debt ceiling. Lagarde said she understands politics, but “there is a time when the higher interest of a nation has to prevail.”
Despite the Federal Reserve indicating a mild recession later in the year, the former International Monetary Fund managing director still believed in the recovery of the global economy.
Lagarde cited Russia’s war in Ukraine, banking sector instability in the US and Switzerland and inflation as creating “a hollow of uncertainty around a recovery that we want to embed.”
The IMF, of which Lagarde was the former head, holds a dimmer outlook. The growth of the economy will slow from 4.2% in 2022 to 2.8% in 2023. Its estimate in January had been for 2.9% growth this year.
“Uncertainty is high, and the balance of risks has shifted firmly to the downside so long as the financial sector remains unsettled,” the organization said in its latest report.
The collapse of Silicon Valley Bank in March has economists estimating that banks are more cautious about lending money.
Lagarde’s comments on China-US trade and the importance of rejuvenation in the post-Newtonian war between China and the US
Regarding China, Lagarde said she understands the competition between the two countries but hopes they can have a dialogue. She thinks trade between China and the US should not be aggressive.