LIVE: Treasury Secretary Janet Yellen Speaks on US Economy

Thanks for the invitation.

Well, what I focus on most is the strength of consumer spending and investment spending. Those two elements of final demand came in line with last year's growth rate: they grew at 3.1%. So this shows the underlying strength of the US economy, continuing robust strength, with 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 that data 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.

I think I still see in the underlying core drivers of economic activity considerable strength. So I think the US economy continues to perform very, very well. I think that was evident; the headline figure was off a little bit, but for reasons that are peculiar and not really indicative of underlying strength.

Oh, I don't see any reason why unemployment needs to rise to bring inflation down. To me, the data says we're on a downward 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, those rents have stabilized, in some cases fallen. 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 and 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 for new rentals are stable, a lot of people are still experiencing the upward adjustment to current levels. There's a lag after conditions in the market stabilize. I have no doubt that housing's 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. I'm 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 toward normal levels.

Well, look, 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 whatever they decide on rate cuts, the economy is clearly performing very well. I certainly don't see it as overheated. The labor market is the strongest we've had in 50 years, with unemployment below 4% for the longest stretch in 50 years, and yet you don't see signs of wage pressures sufficient to contribute meaningfully to inflation. So I think the IMF had it right: we have a good, strong US economy. The US economy is responsible for a substantial share of global growth and is lifting growth all around the world.

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. Healthcare costs are worrisomely high. President Biden has enacted legislation to bring down pharmaceutical prices, to cap the price of insulin for seniors. We have long had a shortage of affordable housing; housing is hard for families, for first-time buyers to afford. He has proposed legislation that would make it easier for a first-time home buyer to acquire a house and encourage sellers—many of whom have locked in very low rates and are reluctant to sell. He has also proposed an incentive for them to put houses on the market. So he's looking to lower housing costs. And of course, there are all the incentives now for clean energy and subsidies for homeowners to put in place new windows, doors, or solar panels to bring down their energy costs over time as well.

We want to see the entire world do well, but the Federal Reserve's first and foremost obligation is to set monetary policy consistent with its goal of price stability, which it has defined as 2% inflation. 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 performance. Adjustments of exchange rates in markets is part of what enables countries to have different policies that are appropriate to them.

A key factor here is the strength of the US 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, is appropriate.

Well, we do have to have a sustainable fiscal policy, and President Biden is committed to that. At the moment, the metric I look at most carefully in judging the sustainability of our fiscal path is the interest we pay on the debt, measured in real or inflation-adjusted terms. Our projection over the next decade, with the deficit cuts that President Biden has proposed, assuming in line with private forecasters that long-term interest rates will be higher, we are projecting real net interest costs of just over 1%, which is manageable. But we do need to bring deficits down. 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. At the same time, it asks corporations and wealthy individuals to pay their fair share. I think both are possible, but we do need to see the deficit go down.

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—the difference between the taxes we actually collect and the taxes that are due if everyone was paying what they're supposed to pay—amounting to an estimated $7 trillion over the next decade. That's a huge opportunity, and there's more we can do on that front that doesn't involve raising tax rates at all; it just means spending enough on enforcement. I should also say customer service, which the IRS had 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. 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. I think there's more we can do. Many of the features of the Tax Cuts and Jobs Act of 2017 will expire next year, and 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, more than 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. Several hundred billion dollars will come from adopting something that is certainly in our interest to do.

Dealing with climate change and creating jobs throughout the country, including in areas that haven't seen a lot of opportunity, like coal communities that have been badly affected, I think these are really important goals. We have raised our estimate of the spending associated with this clean energy program. What that means to me is it's really working well. Eventually, that is going to make America more secure in terms of our energy supplies, less dependent on oil markets, and free 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.

That's an option that's been discussed. The leaders 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, outright seizure of the assets is something that is justifiable, but that's not the only possibility. We could envision the assets serving as collateral for borrowing in the market to help Ukraine. The Europeans have taken a very constructive step: most of the Russian assets held in Belgium at Euroclear have now converted to cash, and Euroclear earns interest on those assets. The European Union has agreed to segregate that interest and essentially move forward on a program in which it would be transferred to Ukraine. This is an approach that could be broadly supported by countries concerned about seizure of assets. 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 to the leaders to discuss in June.

It doesn't require touching the assets.

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.

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. I don't really want to comment on Japan specifically or any other currency, but those would be our expectations.

I'm not going to weigh in on what the appropriate value of the yen is.

Well, first let me say they have actually acknowledged the problem. 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 is heard at the highest level. I believe I've been successful in doing that. And I want to emphasize this isn't just a US issue; this is an issue for Europe, Japan, for emerging markets like India and Mexico. We're not the only country concerned by the market being flooded with goods. At the moment, the capacity in China to produce solar panels, I believe, is on the order of twice total world demand. We've seen this play out before. The US had a healthy solar industry previously in the mid-2000s; Chinese supply drove down prices to the point where many US solar firms went out of business. We're not trying to dominate global markets; we have no problem with China producing, selling globally, and exporting. But the United States, Europe, and other countries also want to have some involvement in producing clean energy products. We're concerned about overdependence on one single country for total global supply of this full range of products. That's not a healthy situation. We've purposely put in place a set of subsidies to make sure we have a healthy industry serving our demand. So this is a concern to us, and not only to us. China has recognized it; they agreed to extended, intense discussion. A week after I was in China, senior Chinese officials came to the US for the IMF and 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. It's important that China recognize the concerns and 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. We're engaging in a dialogue about balancing growth in domestic and global economies. A longstanding theme in discussions about China is the need to support domestic demand, in particular to boost consumption. 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%. For an economy as large and significant as China, exporting its way to full employment is not something acceptable to the rest of the world.

Well, particularly with respect to China, because this has historically been a special issue for the United States. I think it's well documented that the US experienced what is referred to as a China shock—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. That really ended up with a huge loss of good manufacturing jobs in parts of the country that have really never seen employment recover. We have parts of the United States that have been doing very well—the coasts—and parts that have been left behind. Generally, I've been in favor of free trade, but it has to be something that broadly benefits people throughout the country. If it benefits a small group and results in worse outcomes for a large number of people, then I have concerns. What we saw with China—the people who lost their jobs in that China shock, estimated at about 2 million job losses—they really did not do well. There weren't interventions to help them move on to something else. We've seen the consequences in communities that have suffered, with declines in labor force participation, wage loss, or nonexistent wage growth over decades. That has had a very negative effect.

I don't think it should be.

There is 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 have had intensive discussions with the Chinese about this. I think they understand our position, and it is a tool that's available.

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 adjustments take place in the supply chain that enable car manufacturers to qualify for the $7,500 tax incentive for purchases of these cars, is strong. We've issued notices of proposed rulemaking on how to qualify. It does require substantial shifts in the supply chain, but we're seeing that occur. Electric battery production in the United States is just booming. I've been in Georgia, Tennessee, North Carolina, and other places to see huge buildout 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 think 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 shift what you do and take on new opportunities.

Thank you. It's my pleasure. Thanks so much for the invitation.