LIVE: Treasury Secretary Janet Yellen Speaks on US Economy

Secretary Yellen, thank you so much for joining us this morning. Thanks for the invitation. Let's jump right in with today's figures. What is your reaction, hot off the presses, to today's first quarter GDP data? At a first read, it doesn't seem like a great mix if you consider that it's the first below-trend growth in more than a year and a re-acceleration of inflation. Give us your take. So what I focus on most is the strength of consumer spending and investment spending. And those two elements of final demand came in in line with last year's growth rate. They grew at 3.1%. So this is the underlying strength of the U.S. economy that showed just continuing robust strength in the economy, firing on all cylinders. There were drags from inventory, investment, and net exports that were larger than most people expected. A lot of the data there is actually not yet in hand. There could be revisions. But what's really important is private final domestic purchases or consumer spending and investment. And they grew solidly. So you're saying essentially that this is an aberration because it's interesting, right? It comes after IMF meetings just recently where a lot was said about the fact that the U.S. is diverging from the rest of the world. Do you think that is still the case with these numbers? I think I still see in the underlying core drivers of economic activity considerable strength. So I think that the U.S. economy continues to perform very, very well. And I think to me that was evident. The headline figure was off a little bit. But for reasons that are peculiar and not really indicative of underlying strength. So peculiar but not concerning to you? Not concerning. But let's talk about inflation. Because inflation is proving hard to bring down to the 2% target. Federal reserve officials have talked about concern in housing and the services sector. And again, we've seen services today. Are we stuck here? Or is the reality that we're going to have to bring in higher unemployment before we can tackle this? I don't see any reason why unemployment needs to rise to bring inflation down. To me, the data says we're on a deluged path for inflation. It's not exactly a straight line. But when you look at the fundamentals here, you mentioned housing. A significant contributor to inflation at this point remains housing services. Now when we look at the market for new rentals or for rents on single family houses, what we see is those rents have stabilized, in some cases fallen. And ultimately, that is what over time is going to govern increases in the shelter component of the CPI. But if you have a rental contract, you live in an apartment, when your contract is up, your landlord likely adjusts your rent up to the current levels. So even though current levels are now for new rentals are stable, a lot of people are still experiencing the upward adjustment to current levels. In other words, there's a lag. After conditions in the market stabilize as they have, it takes a while for the housing component of inflation to come back to normal levels. So I have no doubt that housing is going to, its contribution is going to be falling over the coming year. That's the single most important contributor to inflation. And although we have a very good, strong job market, the labor market is doing very well, not seeing evidence that the labor market is so hot that wage pressures are a source of inflation. So I believe the fundamentals here are in line with inflation continuing down back to normal levels. So what do today's numbers do to your expectations for rate cuts this year? I'm not going to comment on the Fed. It's up to them to decide. I would simply note that Chair Powell has indicated that they want to see additional evidence of a sustainable decline in inflation. And they've not yet seen that. But what they decide on rate cuts, the economy is clearly performing very well. But I certainly don't see it as overheated. The labor market is the strongest labor market we've had in 50 years, with unemployment below 4% for the longest stretch, really, in 50 years. And yet you don't see signs in the labor market of wage pressures sufficient to contribute meaningfully to inflation. So I think the IMF had it right. We've got a good, strong U.S. economy. The U.S. economy is responsible for a substantial share of global growth and is lifting growth all around the world. So considering the overall picture, do you think that inflation is going to play a factor in or be a factor in the chances of re-election for this administration? Well, I know that Americans are concerned with the high cost of living in a number of different areas. And it's President Biden's top priority to address that concern. You know, health care costs are worrisomely high. President Biden has enacted legislation to bring down pharmaceutical prices to cap the price of insulin for seniors. We've long had a shortage of affordable housing. Housing is hard for a family's first-time buyers to afford. He's proposed legislation that would make it easier for a first-time home buyer to acquire a house and encourage sellers who, many of whom have locked in very low rates on their mortgages and are reluctant to sell. He's also proposed an incentive for them to put houses on the market. So he's looking to lower housing costs to address that concern. And, of course, all the incentives in place now for clean energy and subsidies really to homeowners to be able to put in place, whether it's new windows or doors or solar panels on the roof, to bring down their energy costs over time as well. So you've touched upon a number of issues, and we'll try to tackle them one at a time. Let's go back to the IMF and what was said last week. You know, last week, as we said, the highlight was the divergence between the U.S. economy and other global economies. And many are worried that the dollar staying higher for longer is putting pressure on many other economies around the world. Problems like higher inflation, higher debt service costs. Is this a dynamic that concerns you globally? We want to see the entire world do well, but the Federal Reserve's first and foremost obligation is to set monetary policy to be consistent with its goal of price stability, which it's defined as 2% inflation. And likely if inflation continues to come down, interest rates will moderate some. It is true the dollar has been strong, and there are divergences globally in terms of economic strength and economic performance, and adjustments of exchange rates in markets is part of what enables countries to have different policies that are appropriate to them. What measures can stem the dollar's rise? Well, a key factor here is the strength of the U.S. economy and the level of interest rates. My position has been that large countries with market-determined exchange rates, allowing exchange rates to float with intervention occurring only in very rare and exceptional circumstances, that that's appropriate. I'd like to come back to that point, but first I wanted to ask you about deficits. President Biden wants to cut deficits by $3 trillion by raising taxes on corporations and on the wealthy in 2025. But in the meantime, the IMF and bond investors have voiced alarm about the sustainability of U.S. debt. Does it worry you that there could be a return of the bond vigilantes that we saw last year that was pushing up Treasury yields last autumn, and especially if rates are staying higher for longer? Well, we do have to have a sustainable fiscal policy, and President Biden is committed to that. At the moment, the projection, I think the metric that I look at most carefully in judging the sustainability of our fiscal path is the interest that we pay on the debt measured in real or inflation-adjusted terms. And our projection is over the next decade, with the cuts that, deficit cuts that President Biden has proposed, that those interest expenses, even where we are assuming and forecasting in line with private forecasters that interest rates, longer-term interest rates will be higher, we're projecting real net interest costs of just over 1%, which is manageable. But we do need to bring deficits down. And as you said, President Biden believes we should both invest in our economy so that we can enjoy strong and equitable growth. And his budget proposes to do that. But at the same time, it asks corporations and wealthy individuals to pay their fair share. And I think both are possible. But we do need to see the deficit go down. I mean, on this, do you think that there's a problem with credibility in the achievability of the plan, if you will? Because even going into 2025, there's likely to be, to continue to be a divided government. So how can you convince both the markets and international institutions that this can be grappled with? Well, in spite of the divisions in Congress, we did raise the debt ceiling. We have actually enacted some deficit reduction in connection with that. The Inflation Reduction Act, in spite of providing a lot of incentives for clean energy, did provide a lot of additional resources to the Internal Revenue Service. We have a huge tax gap. That's the difference between the taxes we actually collect and the taxes that we do if everyone was paying what they're supposed to pay. That amounts to an estimated $7 trillion over the next decade. That's a huge opportunity, and there's more that we can do on that front. That doesn't involve raising tax rates at all. It just means spending enough on enforcement. And I should also say customer service, which the IRS has been tremendously deprived of the revenue necessary to be a modern tax agency that treats Americans well and helps them pay their taxes. So there's a lot of revenue to be had there. So we've actually done quite a lot. In spite of divided government, we've brought down prescription drug costs, which both saves the government money and lowers expenses for households as well. And I think there's more we can do. Many of the features of the Jobs Cut and Tax Act of 2017 will expire next year. And so Congress will have to address how to move forward. There is deficit reduction involved in its expiration, but it's also an opportunity. For example, after years of negotiations, in the OECD process, something like 70 countries agreed to enact a minimum tax on the global operations of multinationals headquartered in their countries. Many countries have adopted this. The United States has not yet adopted it. But several hundred billion dollars will come, just for example, from adopting, going along with something that is certainly in our interest to do. So just to finish on this, so the clean energy tax credits, you do not worry that the rising cost of this is pushing back the goalposts, if you will, for fiscal sustainability? You know, dealing with climate change and creating jobs throughout the country, including in areas that really haven't seen a lot of opportunity, including coal communities that have been badly affected. I think these are really important goals. And we have raised our estimate of the spending that will be associated with this clean energy program. What that means to me is it's really working well. And eventually, that is really going to make America more secure in terms of our energy supplies. We'll be less dependent on oil markets and rid ourselves of the power of Putin, for example, to make decisions that escalate the cost of energy for Americans. And it's going to, over time, bring down energy costs considerably. So I think this is a very important initiative. You mentioned Putin. So I'll jump to a very live issue, which is disagreement among G7 nations, among your counterparts, on what to do with the $300 billion in frozen Russian assets. I believe you need to make recommendations before the G7 summit in June. And is it correct to say that the leading option right now is pulling forward the interest on those assets in order to then issue bonds or loans for Ukraine? Is this where the compromise, in particular with European countries, is falling? That's an option that's been discussed. The leaders have asked us to give them a range of options. So we've discussed quite a few. I believe that, based on international law and other factors, that outright seizure of the assets is something that's justifiable. But that's not the only possibility. We could envision the assets serving as collateral for borrowing in the market to help Ukraine. But the Europeans have taken a very constructive step, and that is that most of the Russian assets held in Belgium at Euroclear have now converted to cash. And Euroclear earns interest on those assets. And the European Union has agreed to segregate that interest and essentially move forward on a program in which it would be transferred to Ukraine. And this is an approach that could be broadly supported by countries that are concerned about seizure of assets. And some of the interest could be brought forward through, for example, a loan. But there are a range of options and we want to give several options to the leaders to discuss in June. Okay, so there's nothing that is emerging as the key compromise solution here as of now? There will be a range of options, but the strategy that you mentioned seems like it certainly belongs on the list. And from what you've said, it sounds like it would be possible without outright confiscation of the assets. It doesn't require touching the assets. And how does the new Congressional Authority for seizure play into this? Well, the Repo Act gives the President the option, if he considers it appropriate, to actually seize the assets in the United States. It's a relatively small amount in comparison with what's in Europe, but it gives him that option. Got it. Let's move back to currencies, which we touched upon. So last week, here in Washington, you agreed with your counterparts from Japan and South Korea to, quote, consult closely on foreign exchange market developments. And you yourself acknowledged the serious concerns regarding the sharp declines in these countries' currencies. The yen, of course, I believe, is at the lowest level against the dollar since 1990. Would the U.S. consent to Japan intervening in the currency market to prop up the yen? So our expectation of all major countries, and this is a G7 commitment, is that exchange rates will be market-determined, although intervention when there are disorderly markets or excessive volatility, we would hope that that would be rare and expect that such intervention would occur only rarely, only with excessive volatility and that they would consult in advance. And I don't really want to comment on Japan specifically or any other currency, but those would be our expectations. But from your expertise, I mean, would you say that the yen is out of line with fundamentals at the moment? I'm not going to weigh in on what the appropriate value of the yen is. Okay, so let's move to China because you recently traveled there and you warned during your trip there about the overproduction of electric vehicles, of solar, other products, flooding the global market, killing jobs. It seems that thus far China has not really acknowledged the problem. Does the U.S. need to act now to protect these industries from Chinese imports, even as you and your counterparts are discussing balanced growth? Well, first let me say they have actually acknowledged the problem, and in several recent statements the issue of overcapacity has been recognized. So what I think my responsibility is is to emphasize the undesirable spillovers of excessive subsidies to everything in the clean energy supply chain and to make sure that that's heard at the highest level. I believe that I've been successful in doing that, and I want to emphasize this isn't just a U.S. issue. This is an issue for Europe, for Japan, for emerging markets like India and Mexico. We're not the only country that is concerned by the market being flooded with goods that are being at the moment, for example, the capacity in China to produce solar panels I believe is on the order of twice total world demand. And, you know, we've seen this play before. The United States had a healthy solar industry previously in the mid-2000s. Chinese supply drove down prices to the point where many U.S. solar firms went out of business. Now, we're not trying to dominate global markets. We have no problem with China producing and selling globally and exporting, but the United States and Europe and other countries also want to have some involvement and ability to produce clean energy products that are going to be of great importance. We're concerned about over-dependence on one single country for total global supply of this full range of products. That's not a healthy situation. And we've purposely put in place a set of subsidies that are designed to make sure that we have a healthy industry serving U.S. demand. So this is a concern to us, and not only to us, and China has recognized it. They've agreed to extended intense discussion. A week after I was in China, senior Chinese officials came to the United States attending the IMF World Bank meetings, and we held the fourth sessions of our economic and financial working groups. This issue was discussed intensively. But this is a problem that developed over many years. It's not going to be solved in a day or a week. So it's important that China recognize the concerns, begin to act to address it. But we don't want our industry wiped out in the meantime, so I wouldn't want to take anything off the table. We're monitoring spillovers, and I wouldn't take anything off the table as a response. You know, we're having engaging in a dialogue about balancing growth in the domestic and global economies, and a long-standing theme in discussions about China is the need to support domestic demand, and in particular to boost consumption, not on a transitory basis, but on a you know, for an economy at its stage of development, consumer spending as a share of GDP is incredibly low in China. Its savings rate is close to 45%, and for an economy as large and significant as China, ending up exporting its way to full employment is something that's not something that's acceptable to the rest of the world. You know, before your trip to China, you said something that I think baffled many, which was in an interview you said that your thinking had changed with regard to comparative advantage, essentially in trade, and that you said that when you were growing up, if somebody sent you cheap goods, you would send them a thank you note, but that now your thinking has changed. Has your thinking changed with respect only to China, or has your thinking changed on this writ large? Well, particularly with respect to China, because this has been historically, for the United States, a special issue with regard to China. I think it's well documented that the United States experienced what's referred to as a China shock, which was a, after China was admitted to the WTO, its exports to the United States utterly surged. That partly reflected low labor costs, but it partly reflected subsidies and other Chinese policies, and that really ended up with a huge loss of good manufacturing jobs in parts of the country that have really never seen employment recover. So we have parts of the United States that have been doing very well. The coasts. We have parts of the country that have really been left behind and not seen a lot of opportunities. And generally, I'm in favor, I've been in favor of free trade, but it has to be something that broadly benefits people throughout the country. If it's something that benefits a small group and results in worse outcomes for a large number of people, then I have concerns about it, and what we saw with China, the people who lost their jobs in that China shock, which was estimated about 2 million job loss, they really did not do well, and there weren't interventions to help them move on to something else. We've seen the consequences in communities that have suffered, people who have not been able to move on to something declining labor force participation, wage loss, non-existent wage growth over decades, and I think that's something that's had a very negative effect. So you don't think that this sort of new thinking is a harbinger or an excuse for further protectionism? I don't think it should be. A couple of other questions. Still on China, one other question. You also warned Chinese banks that they face sanctions if they facilitate transactions by Chinese companies to supply dual-use goods to Russia. This has been said it could be a trade that would rebuild Russia's military capabilities. I believe Secretary Blinken, in fact, is in China right now discussing this very point. Is it time to back up your warnings by cutting off Chinese banks? Well, there's an executive order that the President signed that gives Treasury the power to sanction foreign banks in China or other places that are facilitating the flow of military goods to Russia. That's an important power and it's one that we would be prepared to use if necessary. We've had intensive discussions with the Chinese about this. I think they understand our position and it is a tool that's available. But nothing imminent? I have nothing to announce in terms of sanctions. You mentioned President Biden and we've talked a little bit about industrial policy. This administration has placed a lot of emphasis on domestic production of electric vehicles, of batteries, but demand for electric cars is falling or is falling off, rather. It does seem like this is the sort of product that may require sort of constant subsidies to prop up demand. You've talked a little bit about this, but let me push you somewhat to say, has this been a wrong bet by you and the President? I think we're going to see a growing and thriving electric vehicle industry in the United States. We're already seeing that. I think the prospect for sales of EVs, especially as the charging network is built out nationally and the adjustments take place in the supply chain that enable car manufacturers to qualify for the $7,500 tax incentive that's available for purchases of these cars. We've issued notices of proposed rulemaking on how to qualify. It does require substantial shifts in the supply chain in particular, but we're seeing that occur. Battery production, electric battery production in the United States is just booming. I've been in Georgia, Tennessee, North Carolina, other places to see huge build-out of electric batteries for EVs. I think we're going to see swelling demand in the years ahead, and the incentives are all there. I have a last question for you. You are an expert on labor economics, a giant at the academic level, at the global level. What is the one thing that you tell a person who is entering the job market today? One piece of advice. I think it's necessary. Learning and training has to be a lifelong experience. I encourage people to take every opportunity they have to learn new things on the job, to keep their skills updated, and to have the flexibility to be able to shift what you do and take on new opportunities. Thank you. Thank you very much, Secretary Len. It's been a pleasure having you with us. Thank you. It's my pleasure.