Janet Yellen fears a recession in the United States

There is “a risk” of recession in the United States because of the measures taken to slow inflation, which will necessarily weigh on economic activity, but it is possible to escape it, the American secretary said on Sunday. Treasure, Janet Yellen. A recession in the United States is “a risk when the Fed (the American central bank, editor’s note) tightens its monetary policy in the face of inflation”, declared the Minister of Economy and Finance of Joe Biden, on the chain CNN. “So that’s obviously a risk that we’re monitoring,” she added, but “we have a strong labor market, and I believe it’s possible to keep it that way.” Faced with inflation which had reached its highest level in 40 years in June, before slowing down a little in July (8.5%), the central bank is gradually raising its key rates in order to slow down economic activity and ease the price pressure. These policy rates set the tone for commercial banks for the interest rates on loans they offer to their retail and business customers. Higher rates therefore mechanically reduce consumption and investment. “Inflation is far too high and it is essential to reduce it”, hammered Janet Yellen.

US GDP contracted in the first two quarters of 2022

The Fed hopes for a “soft landing”, that is to say bring inflation back to its target of 2%, without plunging the economy into recession, which would cause a surge in unemployment. “I believe there is a way to get there. (…) In the longer term, we cannot have a solid labor market without inflation under control,” said the minister. While the world’s largest economy’s GDP contracted in the first two quarters of 2022, fitting the classic definition of a recession, she again asserted that was not the case. “We are not in a recession. The labor market is exceptionally strong. (…) There are nearly two vacancies for every worker looking for a job,” assured Janet Yellen. The job market remains very tense with a significant shortage of manpower. The unemployment rate, however, rose a little in August, to 3.7%, in particular as the participation rate rose, a sign that many workers left on the side of the road because of Covid, are returning to the market.

Economists divided on Fed policy

Faced with this risk of recession, economists are divided. some like Paul Krugman, 2008 Nobel Prize winner, admit the need for a tightening of the monastic screw at the risk of creating a recession. “The Fed believes – rightly, I believe – that time is running out. So far, price hike expectations have remained subdued, but that won’t last if inflation stays high for a long time. The Fed must therefore act to quickly reduce “underlying” inflation. It is therefore a matter of orthodoxy – to bring inflation down by causing a slowdown. No one knows at the moment whether this slowdown will be severe enough to be called a recession, but even if it is not, it will be painful for consumers and employees,” he wrote in Challenges.

Conversely, Daniel Cohen, president of the Paris School of Economics warns of the damage of a sudden rise in rates. “The idea, carried by monetarist economists, that central banks have the ability to directly control inflation, via monetary creation, without impacting economic activity is false, he cowardly in Challenges. United, economists have estimated that it would take an unemployment shock of at least 5% to break the spiral of rising wages. Faced with inflation, we should be able to do better in Europe, by using fiscal policy, such as France is working on this, to combine wage increases and social benefits in a more subtle way.” Clearly, offset the decline in purchasing power by the state budget rather than blocking the economy by raising interest rates.

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