U.S. Treasury Secretary Janet Yellen said there were no “red lights flashing” in the financial system, and reiterated her view that the U.S. economy has reached a soft landing even with weak job growth.
“For the U.S., the kinds of metrics that we watch that would summarize risks — whether it’s asset valuations or a good degree of leverage — look good, and I don’t see red lights flashing,” Yellen said Saturday in a friendly conversation with Bloomberg News’ David Gura at the Texas Tribune Festival. “I’m mindful of the downside risks” to employment, she added, while saying job growth has been strong.
The Treasury secretary spoke a day after the biggest weekly selloff in U.S. stocks since the regional banking crisis in March 2023 — which was hit by weaker-than-expected job gains, raising concerns that the Federal Reserve will prove too late to start cutting interest rates. The S&P 500 fell more than 4% for the week.
“While there are risks, it’s really remarkable that we were able to bring inflation down as dramatically as we did” while maintaining strong growth, Yellen said in Austin. “That’s what most people call a soft landing.”
Yellen highlighted that wages have been “rising at a decent rate,” outpacing inflation, and that there have been no mass layoffs. She said monthly job gains are close to what is needed to absorb new entrants into the labor market.
China talks
The August jobs report showed that U.S. employment fell short of expectations, with nonfarm payrolls rising by 142,000. The three-month average was the lowest since mid-2020, according to data from the Bureau of Labor Statistics, but the unemployment rate fell to 4.2% — the first decline in five months, reflecting a reversal in temporary layoffs.
Yellen also said she would welcome a visit from her Chinese counterpart to the United States, and was open to another trip to China, where she has stressed the importance of cooperation between the world’s two largest economies. “I would certainly go back there — I would welcome a visit from my Chinese counterpart, and I think we will have that visit one way or another,” she said.
Yellen met for hours with her counterpart, Vice Premier He Lifeng, during a visit to Beijing in April, continuing engagement between the two countries that began last November with President Joe Biden’s meeting with President Xi Jinping.
Asked about the status of the review into Nippon Steel Corp.’s $14.1 billion acquisition of United States Steel Corp., Yellen declined to comment on specifics. Bloomberg reported this week that Biden plans to kill it once the so-called Committee on Foreign Investment in the United States referral reaches his desk. Vice President Kamala Harris has also said U.S. Steel should remain Locally owned And run it.
Foreign investment
The Treasury secretary chairs the Committee on Foreign Investment in the United States, which vets acquisitions deemed to pose security risks. Yellen stressed that the United States remains open to foreign investment.
“Maintaining an open and healthy environment for foreign countries to invest in the United States is a priority, as we invest in many countries around the world,” Yellen said. However, she stressed that foreign investment in the United States could pose national security concerns.
Regarding potential threats to the financial system, Yellen said, “There is much less regulation of the financial system outside of the banking system, and there are risks there.”
She added that while the risks from money market funds have been successfully addressed, there are areas outside the core banking system that remain a concern. “Cybersecurity is a huge and growing risk, and we are working on that,” she said.
Over time, she said, we also have to address the financial trajectory.
“The challenge we face in the United States is that tax revenues are lower than historical norms,” Yellen said, in part due to the tax cuts package passed by former President Donald Trump in 2017.
Looking 10 to 20 years out, she added, spending on Social Security and Medicare will also be a major drain. “The aging of the population and the expansion of these programs will put us on an unsustainable fiscal path,” she said.
“The budget deficit should be reduced to the point where interest costs on the debt remain manageable,” she said, emphasizing her preferred measure of sustainability — keeping inflation-adjusted interest costs relative to GDP below 2%.
Yellen said the budget proposed by the Biden administration would keep the United States within 2% over the next decade.
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