Persistent inflation puts Yellen in the spotlight

WASHINGTON — At her confirmation hearing in early 2021, Treasury Secretary Janet L. Yellen told lawmakers it was time to “act big” on a pandemic relief package, playing down deficit concerns at a time of rising interest rates. perpetually low interest rates and warning that inaction could mean a widespread economic “scar”.

A year and a half later, prices are rising and interest rates are rising. As a result, Yellen’s role in crafting and selling the $1.9 trillion American Rescue Plan, passed by Congress in March of last year, is being scrutinized amid an increasingly intense blame game to determine who is responsible for the highest inflation rates in 40 years. After months of fixing rising prices on temporary supply chain problems that would dissipate, Yellen acknowledged last week that he had got it “wrong”, putting the Biden administration on the defensive and throwing himself into a political storm.

“I think I was wrong about the path that inflation would take,” Yellen said in an interview with CNN, adding that the economy faced unforeseen “shocks” that boosted food and energy prices.

Republican lawmakers, who have spent months blaming President Biden and Democrats for rising prices, gleefully seized on the admission as evidence that the administration has mismanaged the economy and should not be trusted to remain in political control.

The Treasury Department took pains to clarify Yellen’s remarks, saying her acknowledgment that she misinterpreted inflation simply meant that she could not have predicted events such as the war in Ukraine, new variants of the coronavirus or lockdowns in China. After an excerpt from a book suggested Yellen favored a stimulus package smaller than the $1.9 trillion Congress passed last year, the Treasury released a statement denying she had called for more spending restraint. .

At this tenuous moment in her tenure, Yellen is likely to face tough questions about inflation when she testifies before the Senate Finance Committee on Tuesday and the House Means and Means Committee on Wednesday. The hearings are ostensibly on the president’s fiscal 2023 budget request, but Republicans are blaming Biden’s policies, including the $1.9 trillion stimulus package, for high prices for consumer goods, and Yellen’s comments gave them the strength to cast their first term as a failure.

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

The glare is particularly uncomfortable for Yellen, an economist and former chairman of the Federal Reserve, who prides himself on giving straight answers and staying above the political fray.

Mrs. Yellen said in her opening statement on Tuesday that the Biden administration is working hard to deal with inflation.

“We currently face macroeconomic challenges, including unacceptable levels of inflation, as well as the headwinds associated with disruptions caused by the pandemic’s effect on supply chains and the effects of supply-side disruptions to oil and food markets resulting from the war. of Russia in Ukraine”. Mrs. Yellen said, in line with her prepared remarks.

She pointed to Biden’s proposed clean energy initiatives and plans to reform the prescription drug market as measures that could reduce costs for Americans.

In recent weeks, Yellen has had to defend the Biden administration’s economic policies, even as flaws have emerged within the economic team. She has expressed reservations about the lack of progress in reducing some of the Trump administration’s tariffs in China, which she sees as consumer taxes that “were not strategic”, and she has been reluctant to support proposed student debt forgiveness, which could feed even more. inflation if people have more money to spend.

Over the weekend, Ms. Yellen came under fire again after a snippet of an upcoming biography of her indicated that she tried unsuccessfully to reduce the pandemic aid bill because of inflation concerns. The Treasury Department released a rare statement Saturday from Yellen denying that she had argued the package was too large.

“I never asked for the adoption of a smaller package of the American Rescue Plan,” she said, insisting that the funds had helped the US economy weather the pandemic and the fallout from Russia’s war in Ukraine.

Over the past year, Ms. Yellen has been an ardent public supporter of the Biden administration’s economic agenda. She has sometimes publicly clashed with critics like Lawrence H. Summers, a former Treasury secretary, who warned that too much stimulus could overheat the economy.

For months, Yellen – and many other economists – have talked about inflation as “transient”, saying that the rise in prices was a result of dissipating supply chain problems and “base effects” that were making the monthly numbers look worse. compared to prices that were depressed during the early days of the pandemic.

Last May, Yellen appeared to recognize that the Biden administration’s spending proposals had the potential to overheat the economy. She noted at The Atlantic’s Future Economics Summit that policies can spur growth and that the Fed may have to intervene with “modest” interest rate hikes if the economy accelerates too much.

“It could be that interest rates have to go up a little bit to ensure our economy doesn’t overheat, even if the additional spending is relatively small relative to the size of the economy,” Yellen said.

But economic indicators still suggested that inflation remained under control for much of that spring. In an interview with The New York Times last June, 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 a “wage price spiral” in the country. horizon. that could cause inflation to become entrenched.

“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 has not seen that happen.

In the following months, as prices continued to climb, Yellen acknowledged that supply chain problems for items like chips – which are crucial for a variety of products, including cars – were worse than she had initially imagined. She began to project that inflation could last until this year.

“I’m ready to retire the word transient,” Yellen said at a December event sponsored by Reuters, noting that new virus variants hampered economic prospects. “I can agree that this was not an adequate description of what we are dealing with.”

Jerome H. Powell, chairman of the Fed, had signaled days earlier that the Fed would stop using that word to describe inflation, showing that Yellen was not at odds with other key economic policymakers.

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

Summers told CNN last week that Yellen was echoing the views of most mainstream economists last year when she played down inflation and that these incorrect projections required a rethink of economic models.

“The consensus didn’t see the risk of overheating,” Summers said. “I have been wrong many times in my life, but I saw that there was a very substantial demand pressure that was building up and it seemed plausible as there would be bottlenecks.”

Brian Deese, director of the National Economic Council at the White House, rejected the suggestion that Yellen could be sidelined as the administration seeks to change the way it communicates about the economy.

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

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