WASHINGTON – At her confirmation hearing in early 2021, Treasury Secretary Janet Yellen told lawmakers that it was time to “act big” on a pandemic relief package, playing down concerns about deficits at a time of perpetually low interest rates and warning that inaction could mean widespread economic “scarring.”
A year and a half later, prices are soaring and interest rates are marching higher.
As a result, Yellen’s role in crafting and selling the $1.9 trillion American Rescue Plan, which Congress passed in March of last year, is being parsed amid an intensifying blame game to determine who is responsible for the highest rates of inflation in 40 years.
After months of pinning rising prices on temporary supply chain problems that would dissipate, Yellen acknowledged last week that she had gotten it “wrong,” putting the Biden administration on the defensive and thrusting herself into the middle of a political storm.
“I think I was wrong then about the path that inflation would take,” Yellen said in an interview with CNN, adding that the economy had faced unanticipated “shocks” that increased food and energy prices.
Republican lawmakers, who have spent months blaming President Joe Biden and Democrats for rising prices, gleefully seized upon the admission as evidence that the administration had mismanaged the economy and should not be trusted to remain in political control.
The Treasury Department has scrambled to clarify Yellen’s remarks, saying her acknowledgment that she misread inflation simply meant that she could not have foreseen developments such as the war in Ukraine, new variants of the coronavirus or lockdowns in China.
After a book excerpt suggested that Yellen favored a stimulus package smaller than the $1.9 trillion that Congress approved last year, the Treasury released a statement denying that she had urged more spending restraint.
At this tenuous moment in her tenure, Yellen faced tough questions on inflation when she testified before the Senate Finance Committee on Tuesday and is likely to confront similar queries Wednesday when she appears before House lawmakers.
The hearings are ostensibly about the president’s budget request for the 2023 fiscal year, but Republicans are blaming Biden’s policies, including the $1.9 trillion stimulus package, for high prices for consumer products.
Yellen’s comments have given them grist to cast his first term as a failure.
“How can Americans trust the Biden administration when the same people that were so wrong are still in charge?” said Tommy Pigott, rapid response director for the Republican National Committee.
The glare is particularly uncomfortable for Yellen, an economist and former chair of the Federal Reserve, who prides herself on giving straight answers and staying above the political fray.
Yellen said at the hearing Tuesday that current levels of inflation were “unacceptable.
She pointed to “disruptions caused by the pandemic’s effect on supply chains, and the effects of supply side disturbances to oil and food markets resulting from Russia’s war in Ukraine” as the primary reasons for high prices.
She said Biden’s proposed clean energy initiatives and plans to reform the prescription drug market are measures that could lower costs for Americans.
In recent weeks, Yellen has had to defend the Biden administration’s economic policies even as fault lines have emerged within the economic team.
She has expressed reservations about the lack of progress in rolling back some of the Trump administration’s China tariffs, which she views as taxes on consumers that were “not strategic,” and she has been reluctant to support student debt forgiveness proposals, which could further fuel inflation if people have more money to spend.
Over the weekend, Yellen came under fire again after an excerpt from a forthcoming biography about her indicated that she had sought unsuccessfully to pare down the pandemic aid bill because of inflation concerns.
The Treasury Department released a rare Saturday statement from Yellen denying that she argued that the package was too big.
“I never urged adoption of a smaller American Rescue Plan package,” she said, insisting that the funds have helped the U.S. economy weather the pandemic and the fallout from Russia’s war in Ukraine.
Pressed by Sen. Steve Daines, R-Mont., about the extent to which the stimulus money fueled inflation, Yellen argued that countries around the world are all grappling with rising prices and yet they pursued different fiscal policies.
“It can’t be the case that the bulk of the inflation that we’re experiencing reflects the impact of the ARP,” Yellen said.
Yellen also pushed back against the idea that an expanded child tax credit that was included in the stimulus package had a significant impact on inflation.
She acknowledged that it increased demand and might have led to a “marginal” increase in food prices, but said that was justified by the fact that more children had access to food.
“It cut childhood poverty dramatically,” Yellen said.
Yellen did appear to veer away from the view of some Democrats that corporate greed and profiteering was a primary reason for rising prices.
Asked by Sen. Chuck Grassley, R-Iowa, about whether greed was to blame, Yellen demurred.
“I guess I see the bulk of inflation as reflecting supply and demand factors,” Yellen said, sidestepping the issue of greed.
Throughout the last year, Yellen has largely been an ardent public defender of the Biden administration’s economic agenda.
She has clashed publicly at times with critics such as former Treasury Secretary Lawrence Summers, who warned that too much stimulus could overheat the economy.
For months, Yellen – and many other economists – talked about inflation as “transitory,” saying rising prices were the result of supply chain problems that would dissipate and “base effects,” which were making the monthly numbers look worse in comparison with prices that were depressed during the early days of the pandemic.
By May 2021, Yellen appeared to acknowledge that the Biden administration’s spending proposals had the potential to overheat the economy.
She noted at The Atlantic’s Future Economy Summit that the policies could spur growth and that the Fed might have to step in with “modest” interest rate increases if the economy revved up too much.
“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy,” Yellen said.
But economic indicators still suggested that inflation remained under control through much of that spring.
In an interview with The New York Times in June 2021, Yellen said she believed that inflation expectations were in line with the Federal Reserve’s 2% target and that while wages were increasing, she did not see a “wage price spiral” on the horizon that could cause inflation to become entrenched.
“We don’t want a situation of prolonged excess demand in the economy that leads to wage and price pressures that build and become endemic,” she said, adding that she did not see that happening.
In the ensuing months, as prices kept rising, Yellen acknowledged that supply chain problems for items such as microchips – which are crucial for a variety of products, including cars – were worse than she had originally realized.
She began to project that inflation could last well into this year.
“I am ready to retire the word transitory,” Yellen said at a December event sponsored by Reuters, noting that new virus variants had muddled the economic outlook. “I can agree that that hasn’t been an apt description of what we are dealing with.”
Fed Chair Jerome Powell had just days earlier signaled that the Fed would stop using that word to describe inflation, showing that Yellen was not out of line with other key economic policymakers.
Yellen reiterated Tuesday that she and Powell “probably could have used a better word than ‘transitory.’”
Although some Republicans have called for Yellen’s resignation, Democrats outside and inside the Biden administration have in the last week come to her defense.
Summers said on CNN last week that Yellen had been echoing the views of most mainstream economists last year when she played down inflation and that those incorrect projections called for a rethinking of economic models.
“The consensus didn’t see the overheating risk,” Summers said. “I’ve been wrong plenty of times in my life, but I did see that there was very substantial demand pressure that was building and it seemed plausible given that there would be bottlenecks.”
Brian Deese, director of the White House National Economic Council, dismissed the suggestion that Yellen could be sidelined as the administration looks to shift how it communicates about the economy.
“Secretary Yellen is our chief spokesperson on the economy,” Deese told Fox News last week. “That will continue to be the case, as has been the case.”
On Tuesday, Yellen made the case that the U.S. economy was facing a potentially deep downturn when Biden took office and that a robust rescue package made sense at the time. Those funds, she argued, ensured that the economy remained strong.
“We have a the fastest recovery of any developed country,” Yellen said. “There’s no question that inflation is too high and it has to be addressed, and we’re starting to do that from a position of strength.”
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