Yellen expects high US inflation through mid-2022 before easing

US Treasury Secretary Janet Yellen said it's "utterly essential" to raise the US debt ceiling.
US Treasury Secretary Janet Yellen said it's "utterly essential" to raise the US debt ceiling.PHOTO: AFP

WASHINGTON (BLOOMBERG) - United States Treasury Secretary Janet Yellen said she expects price increases to remain high through the first half of 2022, but rejected criticism that the US risks losing control of inflation.

Inflation is expected to ease in the second half of the year as issues ranging from supply bottlenecks, a tight US labour market and other factors arising from the pandemic improve, Dr Yellen said in CNN's State of the Union Address on Sunday (Oct 24). The current situation reflects "temporary" pain, she said.

"I don't think we're about to lose control of inflation," Dr Yellen said, pushing back on criticism by former Treasury Secretary Lawrence Summers this month.

"Americans haven't seen inflation like we have experienced recently in a long time. But, as we get back to normal, expect that to end."

On Friday (Oct 22), Federal Reserve chair Jerome Powell sounded a note of heightened concern over persistently high inflation as he made clear that the central bank will begin tapering its bond purchases shortly, but remain patient on raising interest rates.

The S&P 500 Index posted its first decline in eight days. Mr Powell said policies are "well-positioned" to manage a range of outcomes.

Dr Yellen declined to say how she had advised President Joe Biden on his decision whether to reappoint Mr Powell.

However, she said that financial regulation had "markedly strengthened" under Mr Powell's term, as it did during hers and that of her predecessor, Mr Ben Bernanke.

As the pandemic added stress to the financial markets, "the core of our financial system did very well because of the improvements in capital liquidity, risk management, stress testing", she said. "And those improvements have stayed in place during the Powell regime."

Debt ceiling

Dr Yellen also said it was "utterly essential" to raise the US debt ceiling, reiterating earlier warnings about the consequences of a potential US default.

The US posted the second-largest annual budget deficit on record for 2021 as pandemic-relief spending sustained the federal government's massive borrowing needs.

The deficit for the fiscal year through September was US$2.77 trillion, compared with the US$3.1 trillion peak seen in the previous year, according to a Treasury Department report in the past week.

As a share of the economy, the deficit narrowed to 12.4 per cent in the fiscal year, from 15 per cent in 2020 - the biggest since World War II.

"It's a housekeeping matter, doing what's necessary to pay our bills," Dr Yellen said. "I have confidence it will get done."