Yellen: US could still avoid recession with economy in ‘fundamentally good shape’

Treasury Secretary Janet Yellen said Friday she believes the U.S. economy can still achieve a “soft landing” and achieve lower inflation without a recession.

Speaking on the sidelines of the Group of 20 finance ministers meeting in India, Yellen said the economy is in “fundamentally good shape” and may be able to withstand the pressure of the Federal Reserve’s fight against inflation, according to Reuters.

“Employment, you know, continues to increase. Households are in good shape. You know, we don’t have balance sheet problems of the type that we had prior to the [2008-2009] global financial crisis,” Yellen said, according to Reuters.

Yellen’s remarks in India came hours before the Commerce Department reported an unexpected increase in inflation and a surprisingly strong jump in consumer spending, two warning signs for the Fed.

The personal consumption expenditures (PCE) price index — the Fed’s preferred gauge of inflation — rose 0.6 percent in February and 5.4 percent over the past 12 months. It was the first increase in annual PCE inflation rate since June, when it peaked at 7 percent.

Even so, Americans also saw a large jump in take-home pay in January, with personal income rising 0.6 percent after falling since October. Consumer spending also rose 1.1 percent on the month, the largest monthly increase since President Biden signed off on the final round of COVID-19 stimulus checks in March 2021.

While the spending and income numbers are perhaps good news for American workers and households, the increase in inflation puts more pressure on the Fed to boost interest rates.

“The new inflation data won’t sit well with the Fed,” wrote Nancy Vanden Houten, lead U.S. economist at Oxford Economics, in a Friday analysis.

The Fed’s interest rate-setting committee is set to meet March 21 to 22 and is expected to issue another hike of 0.25 percentage points. But the January bump in inflation may push the Fed to hike rates faster and more often than they had anticipated in December.

“This isn’t what the Fed wants but the communication challenges with hiking 50 [basis points] in March are high, so we think it’s more likely at this stage that the central bank hikes 25 [basis points] over the next few meetings and keeps rates higher for longer,” Vanden Houten wrote.