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Even with inflation cooling down, there’s still a ‘risk of recession’ since the Fed keeps hiking interest rates, Janet Yellen says

Jerome Powell and Janet YellenU.S. Federal Reserve Board Chairman Jerome Powell listens as U.S. Treasury Secretary Janet Yellen speaks during a meeting with the Treasury Department’s Financial Stability Oversight Council at the U.S. Treasury Department on October 03, 2022 in Washington, DC.

Photo by Anna Moneymaker/Getty Images

  • The Federal Reserve is expected to raise interest rates again this week.
  • Treasury Sec. Janet Yellen said given the continued hikes, the “risk of recession” persists.
  • Some Democratic lawmakers have urged the Fed to cease the hikes to avoid a severe economic downturn.

The economy is moving in the right direction — but it doesn’t mean a 2023 recession is off the table, the top Treasury official said.

On Wednesday, the Federal Reserve is expected to raise interest rates by 25 basis points, which marks a comedown from the December Federal Open Market Committee (FOMC) meeting’s decision to hike rates by 50 basis points.

This week’s meeting comes after the economy got a slough of promising data — last week, the Bureau of Economic Analysis revealed US gross domestic product (GDP) grew 2.9% in the fourth quarter of 2022, and the Consumer Price Index, which measures inflation, rose 6.5% year-over-year in December, a slowdown from November’s reading of 7.1%.

That’s why estimates suggest the Fed will slow its interest rate hikes again in February. However, Treasury Secretary Janet Yellen doesn’t want the good economic results the country has seen over the past few months to cloud the possibility of a recession this year.

“I’m reasonably satisfied by the data that I’ve seen so far, but I don’t want to minimize the risk of recession,” Yellen told Bloomberg News in Johannesburg last week, referring to the central bank’s continued actions in “slowing down the economy” by raising interest rates.

“The path that I see, to maintaining a strong labor market while bringing inflation down, does involve a slowdown in growth,” Yellen added.

Yellen has previously been careful not to dismiss a potential recession, but she told 60 Minutes in December that she’s “very hopeful that the labor market will remain quite healthy so that people can feel good about their finances and their personal economic situation.”

Still, the FOMC’s December meeting minutes said that inflation remains “unacceptably high,” and as a result, not one participant “anticipated that it would be appropriate” to cut interest rates in 2023.  

That notion has some Democratic lawmakers concerned. On Monday, Democratic Sen. John Hickenlooper sent a letter to Fed Chair Jerome Powell urging him to consider halting interest rates increases given recent data that inflation is slowing in the country.

“Inflation is at its lowest level since October 2021, and economists widely believe inflation is already or will soon be under control,” Hickenlooper wrote.

“Further interest rate hikes will only make it more expensive for small businesses to fund their operations. It will also put a drag on consumer spending, which accounts for two-thirds of the economy,” he continued. “At the same time, widespread concern of a recession continues to weigh on the economy because 20% expect to layoff employees.”

Massachusetts Sen. Elizabeth Warren and Senate Banking Chair Sherrod Brown are among other lawmakers who have in the past raised red flags with continued interest rate hikes due to their potential to trigger severe economic downturn. 

“The Fed has a 2% inflation target and needs to remember it has a dual mandate: price stability and maximum employment. Millions of American jobs are at risk with the Fed’s extreme rate hikes,” Warren wrote on Twitter earlier this month.

Powell has yet to be swayed by those Democrats’ concerns, and he said in December that “I don’t think anyone knows whether we’re going to have a recession or not.” But he has expressed confidence that the US can still achieve a soft landing, in which the economy lowers inflation while avoiding a recession — and the Fed’s actions in the coming months will determine whether an economic downturn is actually avoidable as pandemic recovery persists.

Read the original article on Business Insider