Yellen Says No Red Lights Flashing as US Makes Soft Landing

Treasury Secretary Janet Yellen said there are no “red lights flashing” for the financial system, and reiterated her view that the US economy has reached a soft landing even as job growth weakens.
“For the US, the kinds of metrics that we would monitor that would summarize risks — whether it’s asset valuations or a good degree of leverage — things look good, I don’t see red lights flashing,” Yellen said Saturday in a fireside conversation with Bloomberg News’ David Gura at the Texas Tribune Festival. “I’m attentive to downside risks” on employment, she said, while saying job growth is solid.
The Treasury chief spoke a day after US equities capped the biggest weekly selloff since the March 2023 regional banking crisis — roiled by a weaker-than-expected gain in payrolls that stoked concern the Federal Reserve will prove late to begin lowering interest rates. The S&P 500 Index slid more than 4% over the week.
“While there are risks, it really has been amazing to be able to get inflation down as meaningfully as we have” while maintaining strong growth, Yellen said in Austin. “This is what most people would call a soft landing.”
Yellen highlighted “wages going up at a decent clip,” surpassing the pace of inflation, along with the lack of any mass layoffs. Monthly job gains are at about the level needed to absorb new entrants to the labor market, she said.
China Talks
The August jobs release showed US hiring fell short of forecasts, with nonfarm payrolls rising 142,000. The three-month average hit the lowest since mid-2020, according to Bureau of Labor Statistics data, but the unemployment rate edged down to 4.2% — the first decline in five months, reflecting a reversal in temporary layoffs.
Yellen also said she would welcome a visit to the US by her Chinese counterpart, and is open to another visit of her own to China, as she underscored the importance of the world’s two largest economies engaging with each other. “I certainly may go back there — I would welcome a visit by my Chinese counterpart, and my guess is that we will have one way or another a visit.”
Yellen met for hours with her counterpart Vice Premier He Lifeng during a visit to Beijing in April, continuing the re-engagement between the two nations that began last November with President Joe Biden’s sit-down with President Xi Jinping.
Asked about the status of a review into Nippon Steel Corp.’s $14.1 billion takeover of United States Steel Corp., Yellen declined to comment on any specifics. Biden plans to kill it as soon as the so-called CFIUS referral lands on his desk, Bloomberg reported this week. Vice President Kamala Harris has also said US Steel should remain domestically owned and operated.
Foreign Investment
The Treasury secretary heads the CFIUS panel, which vets takeovers perceived to entail security risks. Yellen underscored that the US remains open to foreign investment.
“It is a priority to maintain an open and healthy environment for foreign countries to invest in the US just as we’re investing in many countries around the world,” Yellen said. Still, she stressed that foreign investment in the US can pose national security concerns.
With respect to potential threats to the financial system, Yellen said “there’s much less regulation of the financial system outside the banking system, and there are risks there.”
While dangers stemming from money market funds have hopefully been successfully dealt with, there are a few areas outside core banking that remain of concern, she added. “Cybersecurity is a huge and growing risk, we’re working on that.”
Over time, the fiscal trajectory also needs to be addressed, she said.
“A challenge we face in the United States is that the level of tax revenue has declined in comparison with historic norms,” in part thanks to former President Donald Trump’s 2017 tax-cut package, Yellen said.
Looking out 10 to 20 years, she said, Social Security and Medicare spending will also prove a major drain. “Aging of the population and expansion of those programs can put us on a fiscal path that’s not sustainable.”
Budget “deficits need to be brought down to the point where the interest costs on the debt remain manageable,” she said, reiterating her preferred metric for sustainability – keeping the inflation-adjusted interest cost relative to gross domestic product at less than 2%.
The Biden administration’s proposed budget would keep the US within that 2% ratio over the coming decade, Yellen said.
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