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Janet Yellen to Yahoo Finance: 'I don't see the basis' for a recession

Treasury Secretary Janet Yellen told Yahoo Finance that she does "not see the basis" for a US recession, and that she expects the Federal Reserve will hit its 2% inflation target next year — a faster pace than projected by central bank policymakers.

"I do expect inflation to come down, and as we get into next year I believe that inflation will go back to the Fed’s 2% target," she said in an exclusive national interview Monday.

FILE - Treasury Secretary Janet Yellen testifies during a Senate Appropriations Subcommittee hearing, June 4, 2024, on Capitol Hill in Washington. The Biden administration is announcing new federal initiatives to increase access to affordable housing as high interest rates and still-high prices on groceries and other necessities have dramatically pushed up the cost of living in the post-pandemic years. Yellen is traveling to Minneapolis on Monday, June 24, 2024, to promote the new investments. (AP Photo/Jacquelyn Martin, File)
Treasury Secretary Janet Yellen testifying in Washington earlier this month. (AP Photo/Jacquelyn Martin, File) (ASSOCIATED PRESS)

Fed officials last week released a median projection showing the Fed’s preferred measure of inflation would return to 2% in 2026. Fed officials also signaled just one rate cut this year as it takes longer than expected to get inflation down.

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A big reason Yellen expects inflation to cool further has to do with shelter costs, which have been running hot even as other prices ease. Rental prices of new apartments have stabilized in many parts of the country, she said, and that will start to reduce costs as more renters renew their contracts.

"That has been holding housing cost increases above normal levels," she said. "I feel pretty confident that is something that will come down over the next year and keep moving inflation down."

Yellen on Monday announced some measures designed to help with high housing costs, including $100 million via a new fund over the next three years to support affordable housing financing.

US home prices hit a record high in May as the median price of a previously owned US home climbed 5.8% from a year ago to $419,300, according to the National Association of Realtors.

"I don’t want to say there is a silver bullet" to the housing affordability issue, Yellen said. But "we want to use every tool we have."

She declined to say when she thought the Fed might offer some relief to the housing market by lowering interest rates, saying that it all depends on what the data shows policymakers.

FILE - A for sale sign is posted in front of a home in Sacramento, Calif., March 3, 2022. The Biden administration is announcing new federal initiatives to increase access to affordable housing as high interest rates and still-high prices on groceries and other necessities have dramatically pushed up the cost of living in the post-pandemic years. Treasury Secretary Janet Yellen is traveling to Minneapolis on Monday, June 24, 2024, to promote the new investments. (AP Photo/Rich Pedroncelli, File)
A for sale sign is posted in front of a home in Sacramento, Calif. (AP Photo/Rich Pedroncelli, File) (ASSOCIATED PRESS)

But she said the Fed is well aware of the risks of waiting too long. Rates are currently at a 23-year high and have been at that level since last July.

"They certainly don't want to cause a recession when it's unnecessary, and that's the balancing act that they have," she said.

Yellen does not see a severe downturn happening, noting that "I don’t see the basis really for a recession in the outlook" and that "I think we have a good strong economy."

She was critical of tax cuts passed during the administration of Donald Trump that lowered the corporate rate from 35% to 21%, saying that decision added to the deficit and "promised an investment boom which really did not materialize."

It was responsible for "many of the problems that we face now with our fiscal trajectory" and "that would concern me to leave all that in place."

The Congressional Budget Office said last week that the federal budget deficit will reach an estimated $1.9 trillion in fiscal year 2024, up from the $1.5 trillion estimate released just four months ago.

Yellen said President Biden's 2025 budget proposed an additional $3 trillion of defect reduction over the next 10 years, and that would be sufficient to hold the debt-to-GDP ratio "at more or less its current level" — which she said was 100%.

Interest payments on the national debt, she said, are at "normal historical levels" even with high interest rates.

If things stay that way while the US engages in deficit reduction, "I think we will be on a fiscally sustainable course."

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