The Federal Reserve has to use its judgment to bring inflation down along with the ever-present risk of a recession, Treasury Secretary Janet Yellen said Sunday.
“Of course [a recession] is a concern. The Fed is going to need great skill and also some good luck to achieve what we sometimes call a soft landing, which is bringing inflation down while maintaining the strength of the labor market,” Yellen said in an interview on CNN’s “State of the Union.”
Yellen said there is still a path to accomplishing a soft landing.
“We’ve got a good, strong labor market and I believe it is possible to maintain that,” Yellen said.
But over the long run, the labor market can’t remain strong without inflation under control, she added.
The Biden administration has been supportive of the Fed’s rate hikes this year.
Harvard Professor Jason Furman said Biden is a rare president for his support for a deliberate attempt to slow the economy.
With Biden on board, criticism of the Fed policy has come from the progressive wing of the Democrats.
Sen. Elizabeth Warren, D-Mass., has been a vocal critic, saying Fed interest-rate hikes will put people out of work and close small businesses.
“I am very worried the Fed is going to tip this economy into recession,” she said, in an earlier CNN interview.
In his key speech in Jackson Hole, Wyo., late last month, Fed Chairman Jerome Powell said rate hikes might cause “pain” and “a sustained period of below-trend growth.”
“While higher interest rates, slower growth and softer labor-market conditions will bring down inflation, they will also bring some pain to households and businesses,” Powell said.
“These are unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” he added.
But there was a palpable sense from Fed officials that they think the risks of a recession have receded, at least over the next six months.
On Friday, Fed Gov. Christopher Waller said concern over a recession actually began to ease in early August when the Labor Department estimated the labor market had created over 500,000 jobs in July.
Fed watchers believe the central bankers think the economy is strong enough that they can push interest rates to 4% by the end of the year, including a 0.75-basis-point rate hike at their next meeting in 10 days.
At the moment, the Fed’s benchmark rate is in a range of 2.25%-2.5%.
Confusing the argument is the fact that the U.S. economy has experienced two quarters of negative growth this year, which is the informal definition of a recession.
But economists view that weakness in GDP as more a case of statistical noise.