Persistent inflation puts Yellen in the spotlight


WASHINGTON — During her confirmation hearing in early 2021, Treasury Secretary Janet L. Yellen told lawmakers it was time to “act big” on a pandemic relief package, downplaying concerns about deficits in an era of perpetually low interest rates and warning that inaction could mean a widespread economic “scar”.

A year and a half later, prices are soaring and interest rates are skyrocketing. As a result, Ms Yellen’s role in crafting and selling the $1.9 trillion US bailout package, which Congress passed in March last year, is analyzed amid a game of escalating blame for who is responsible for the highest inflation rates in 40 years. . After months of associating the price hike with temporary supply chain problems that would dissipate, Ms Yellen admitted last week that she was “mistaken”, putting the Biden administration on the defensive and throwing herself in the midst of a political storm.

“I think I was wrong then about the path that inflation would follow,” Ms Yellen said in an interview with CNN, adding that the economy had to deal with unforeseen “shocks” which had pushed up commodity prices. food and energy.

Republican lawmakers, who have spent months blaming President Biden and Democrats for the price hikes, gleefully seized on this admission as proof that the administration mishandled the economy and should not be trusted. to maintain political control.

The Treasury Department was quick to clarify Ms Yellen’s remarks, saying she acknowledged she misinterpreted inflation simply to mean she couldn’t have predicted developments such as the war in Ukraine, new variants of the coronavirus or lockdowns in China. After a book excerpt suggested Ms Yellen favored a stimulus package less than the $1.9 trillion approved by Congress last year, the Treasury issued a statement denying that she had asked for more. severe expenditure restraint.

At this delicate time in her tenure, Ms. Yellen is expected to face tough questions about inflation when she testifies before the Senate Finance Committee on Tuesday and the House Ways and Means Committee on Wednesday. The hearings apparently focus on the president’s budget request for fiscal year 2023, but Republicans blame Mr Biden’s policies, including the $1.9 trillion stimulus package, for high consumer product prices , and Ms. Yellen’s comments gave them water to cast her first term as a failure.

“How can Americans trust the Biden administration when the same people who got it so wrong are still in charge?” said Tommy Pigott, rapid response director for the Republican National Committee.

The gaze is particularly uncomfortable for Ms. Yellen, an economist and former chair of the Federal Reserve, who prides herself on giving clear answers and staying above the political fray.

In recent weeks, Ms. Yellen has had to defend the economic policies of the Biden administration even as fault lines have emerged within the economic team. She expressed reservations about the lack of progress in removing some of the Trump administration’s Chinese tariffs, which she sees as taxes on consumers that were “not strategic,” and she hesitated to support the proposals to cancel student debt, which could further fuel inflation if people have more money to spend.

Over the weekend, Ms Yellen came under fire again after an extract from a forthcoming biography of her said she had unsuccessfully sought to cut the pandemic aid bill due to inflation issues. The Treasury Department released a rare statement from Ms Yellen on Saturday denying that she argued the package was too big.

“I never called for the passage of a smaller US bailout,” she said, insisting the funds have helped the US economy weather the pandemic and the fallout from the coronavirus. Russia’s war in Ukraine.

Throughout the past year, Ms. Yellen has been a strong public advocate for the Biden administration’s economic agenda. She has occasionally clashed publicly with critics such as Lawrence H. Summers, a former Treasury Secretary, who warned that too much stimulation could overheat the economy.

For months, Ms Yellen – and many other economists – called inflation ‘transient’, saying the rise in prices was the result of supply chain problems dissipating and ‘base effects’ , which made the monthly figures worse compared to prices that were depressed at the start of the pandemic.

In May last year, Ms Yellen appeared to acknowledge that the Biden administration’s spending proposals had the potential to overheat the economy. She noted at the Atlantic Future Economy Summit that policies could boost growth and that the Fed may have to step in with “modest” interest rate hikes if the economy picks up too much.

“Interest rates may need to rise somewhat to ensure our economy doesn’t overheat, even if the additional spending is relatively small compared to the size of the economy,” Yellen said.

But economic indicators still suggested that inflation had remained subdued for much of this spring. In an interview with The New York Times last June, Ms Yellen said she believed inflation expectations were in line with the Federal Reserve’s 2% target and that while wages were rising, she did not see no “wage price spiral” on the horizon. which could lead to the entrenchment of inflation.

“We don’t want a situation of prolonged excess demand in the economy that leads to wage and price pressures that build up and become endemic,” she said, adding that she had no seen this happen.

In the months that followed, as prices continued to rise, Ms Yellen acknowledged that supply chain issues for items such as chips – which are crucial for a variety of products, including cars – were worse than she had originally imagined. She began to project that inflation could last well into the year.

“I am ready to withdraw the word transitional,” Ms Yellen said at a December event sponsored by Reuters, noting that new virus variants had clouded the economic outlook. “I can agree that hasn’t been an apt description of what we’re dealing with.”

Fed Chairman Jerome H. Powell reported a few days earlier that the Fed would stop using the word to describe inflation, showing that Ms Yellen was not out of step with other key economic decision makers.

Although some Republicans have called for Yellen’s resignation, Democrats outside and inside the Biden administration have come to her defense last week.

Mr. Summers told CNN last week that Ms. Yellen echoed the views of most mainstream economists last year when she downplayed inflation and that those incorrect projections called for rethinking economic models.

“The consensus did not see the risk of overheating” Mr. Summers said. “I’ve been wrong many times in my life, but I saw that there was very significant demand pressure building and it seemed plausible given that there would be bottlenecks.”

Brian Deese, the director of the White House National Economic Council, dismissed the suggestion that Ms Yellen could be sidelined as the administration seeks to change the way it reports on the economy.

“Secretary Yellen is our primary spokesperson on the economy,” Deese told Fox News last week. “It will continue to be the case, as it has been.”

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