Treasury Secretary Janet Yellen told Yahoo Finance that she “sees no basis” for a U.S. recession and expects the Federal Reserve to hit its 2% inflation target next year, a faster pace than central bank policymakers had predicted.
“We expect inflation to decline and believe that as we go into next year inflation will return to the Fed’s 2 percent target,” he said in an exclusive national interview on Monday.
Fed officials last week released their median forecast for the central bank’s preferred inflation measure to return to 2% in 2026. They also signaled they would cut interest rates just once this year because inflation is taking longer to subside than expected.
A big reason Yellen expects inflation to moderate further has to do with housing costs, which have been rising even as other prices have fallen. Rental prices for new apartments have stabilized in much of the country, and as more renters renew their leases, rents should start to fall, she said.
“That’s keeping home price growth below normal levels,” she said. “I’m confident that we’ll see lower home prices and continued lower inflation over the next 12 months.”
Yellen on Monday announced several steps to help address rising home prices, including disbursing $100 million over the next three years through a new fund to help finance affordable housing.
The median price of an existing U.S. home rose 5.8% from a year ago to $419,300, the highest home price record in May, according to the National Association of Realtors.
While Yellen said she didn’t want to “say there’s a silver bullet to the problem of rising house prices,” she added, “we want to take all the measures we can.”
He declined to say when he thinks the Fed might cut interest rates and provide some relief to the housing market, saying it all depends on what the data shows policymakers.
But he said the Fed is well aware of the risks of waiting too long. Interest rates are currently at their highest in 23 years and have remained there since last July.
“They certainly don’t want to cause a recession when it’s unnecessary, so it’s their balancing act,” she said.
Yellen doesn’t see a serious recession coming, saying, “I don’t see any basis for a recession in the outlook” and “I think our economy is in extremely good shape.”
She criticized tax cuts under President Donald Trump that slashed corporate tax rates from 35% to 21%, saying the decision increased the budget deficit and “promised an investment boom that never materialized.”
He said it was the cause of “a lot of the issues we’re currently facing on our fiscal trajectory” and that “it would be a concern to me to leave it as it is.”
The Congressional Budget Office said last week that it expects the federal budget deficit to reach $1.9 trillion in fiscal year 2024, up from a $1.5 trillion estimate released just four months ago.
Yellen said President Biden’s fiscal 2025 budget proposes an additional $3 trillion in debt reduction over the next decade, enough to keep the debt-to-GDP ratio “about current levels,” which she said is 100%.
She said interest payments on government bonds are at “historically normal levels” despite high interest rates.
If things continue on this trajectory while the U.S. works to reduce the budget deficit, “we will be on a fiscally sustainable path,” he said.
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