WHEN: Today, Wednesday, December 13, 2023
WHERE: CNBC’s “Squawk on the Street”
Following is the unofficial transcript of a CNBC exclusive interview with United States Treasury Secretary Janet Yellen on CNBC’s “Squawk on the Street” (M-F, 9AM-11AM ET) today, Wednesday, December 13. Following is a link to video on CNBC.com:
All references must be sourced to CNBC.
SARA EISEN: OK. Thank you, Carl. I am here at the Treasury Department with the Treasury Secretary, Janet Yellen, for an exclusive. It’s good to see you again.
JANET YELLEN: Thanks so much, Sara. Thanks for the invitation.
EISEN: Thank you for taking the time. So, 2023, I think the big surprise was the U.S. economy’s resilience. You’ve been in the soft landing camp for a while, but this time last year, how many people were predicting recession?
YELLEN: Well, I do remember that there were dire predictions that a recession was utterly unavoidable. But I have to say, I always felt what I said was, I believe there’s a path by which the economy could achieve a soft landing, inflation coming down with the labor market remaining strong. And it was not necessary to have a period of high inflation, high unemployment to bring inflation down. I thought that because I never felt that inflationary expectations had been permanently dislodged in a way that would give rise to an ongoing wage price spiral that makes inflation self-perpetuating. What I thought was that there were major disturbances in many product markets because of the pandemic and supply chain issues connected with it and that the labor market had also experienced a severe shock with an unprecedented number of people losing jobs when the economy started recovering rapidly, they had to get back into good matches with new employers, and this was disruptive. It led to market pressures. We saw job vacancies. Job openings were enormously high. And it took a while for people to settle down into new jobs. The quit rate was high. There was just a lot of turbulence in the job market. That’s really settled down. As that’s happened, quit rates and job openings have fallen back to normal, and we really haven’t seen any significant uptick at all in layoffs. The labor market remains strong and inflation has come down meaningfully where we’re not all the way there. There’s further to go for the Fed to achieve its 2 percent objective, but I think we’re on a path, and you can see a consistent pattern in inflation coming down over time.
EISEN: Soft landing.
YELLEN: So, I think this is a soft landing. And you know, this is not to say that Americans are feeling great about the economy.
EISEN: I was going to say, you don’t get a lot of credit for it. I mean the administration, less than a third of voters, according to a new Wall Street Journal poll thinks that Bidenomics is working. Why is that?
YELLEN: Although, I thought it was a hopeful sign that in the recent preliminary Michigan survey, you do see an uptick in consumer confidence. Consumers are beginning to understand that inflation is coming down. And although, wage growth has moderated some, it remains healthy. And inflation has come down and now real, earnings are going up. And so, gradually over time, I think people will feel better about the economy. Now, the level of prices in some cases is higher than it was before the pandemic. And people notice that. They notice their bills, certain bills are higher. Rent would be a very good example. Apartment rentals, for example.
EISEN: Why isn’t that coming down?
YELLEN: Well, it’s stopped going up, but we did have very big changes in the way people live and work during the pandemic, and I think it gave rise to pressures on real estate prices, both rentals and house prices went up. So, you know, young people who are — have aspired to own a home, who are renting, they’re seeing their monthly rent go up, although new rental prices have stabilized. If you’re in the middle of a rental contract and it renews, you’re likely to see the rent to just up to current market levels, and that’s a big expense, and people feel that. But I think we’re in the path — and some important prices — well, gas prices are now way down. Number of states where it’s a gallon is running at under $3 a gallon, which is great news for consumers. We saw egg prices utterly skyrocket, mainly because of the avian flu. They’ve come down, back toward pre pandemic levels. But, you know, still –
EISEN: But elevated?
YELLEN: Yes.
EISEN: So, when do you think the Fed will achieve its 2 percent inflation target? When does that happen?
YELLEN: Well, my expectation is that inflation will continue to come down. And I would frankly expect – I don’t want to do a precise forecast here for you, but I think when we come to the end of 2024, 2 is certainly, you know, likely to be the first numeral. And, you know, I think we’re getting a lot closer.
EISEN: How likely is it that the soft landing continues into 2024? Because we got it in 2023, but there are risks on the horizon.
YELLEN: So, I think there’s a reasonable chance we get it. I think that we’re on that path. My baseline is that we’ll achieve a soft landing. Are there risks? Of course, there are risks. We could experience another global shock that could be unsettling to that path that could jolt inflation upwards or have adverse effects on the economy. Monetary policy is an art and not exactly a science yet, and it requires skill and a good dose of luck to get that exactly right. But I think as a baseline with solid probability, we’re in the path for a soft landing.
EISEN: So, no recession —
YELLEN: And I think that’s good.
EISEN: What’s the recession risk at this point?
YELLEN: Well, I believe in any year, even if you knew nothing about the economy, there’s a recession risk that’s over 10 percent. So, there is always some recession risk. I don’t think it’s particularly high. Consumer spending, we have seen remain solid. Consumers built up a buffer stock of saving and wealth during the pandemic, they’ve been spending that down gradually, that stock is eroding, but as long as – it’s coming back to more normal levels, and as that happens, expect to see the pace of consumer spending slow somewhat, but probably to a more normal level that’s consistent with trend like growth, which is what I expect. I mean, another quarter like the third quarter, I don’t expect growth at that pace but look, we’ve got more people coming into the labor force. Adult labor force participation is at the highest level in several decades. The economy can handle that. It keeps growth solid, incomes moving up that support consumer spending. I think the baseline here is very good, and of course there are always risks, but they’re not outsized to my thinking.
EISEN: Would the Fed cutting interest rates help preserve that soft landing next year?
YELLEN: I’m not going to give the Fed advice on what they need to do. You know, I’m very happy with the outcomes we’ve seen in the economy over the last year or so, and I’m going to trust them to make good calls.
EISEN: OK. I’ll ask it another way. The market is expecting a number of Fed cuts next year and has been very excited about that. It has loosened financial conditions quite a bit. Does that improve the outlook and does it risk inflation flaring back up?
YELLEN: Well, both things are possible. And I think the Fed has to think about what path of financial conditions they regard as consistent with keeping the economy on a soft landing path, they surely want to see inflation continue to move down. As inflation moves down, it’s in a way natural that interest rates should come down somewhat because real interest rates would otherwise increase, which can tend to tighten financial conditions. But, you know, they have two risks to manage, one is that inflation doesn’t come down back toward their target as they envision, and the other is that the economy becomes too weak. And I’m going to leave that call to them.
EISEN: On Fed a day… The other thing that the market’s been paying a lot of attention to lately, in your wheelhouses, is treasury auctions, which is something we haven’t been paying as much attention to in recent years, but now, are watching because we’ve had some wobbly ones. Have you been focused on this?
YELLEN: Well, I work regularly with our team that manages treasury debt and treasury auctions. I meet regularly with the treasury borrowing advisory committee, which is a group of mainly private sector advisers who help us understand what’s happening in the treasury market. We always seek their advice. You know, the cornerstone of treasury policy when it comes to debt is regular and predictable issuance. We issue across the curve. We give forward guidance in order not to surprise markets. The objective is over time to achieve the lowest borrowing costs we can for the federal government and that also involves keeping treasury markets liquid and well-functioning. And we did make an adjustment too. We’ve had to step up issuance to finance ongoing deficits and to refinance maturing securities. And in view of some stresses we had seen in the long end of the curve, we made a very modest adjustment. So, we’re stepping up issuance, we’re stepping it up at, essentially, all maturity levels, but we chose to do a little bit less at the long end, given our understanding of the demand in markets and pressures that exist.
EISEN: Are investors right to be nervous about demand with all of this issuance set for next year?
YELLEN: You know, I think that it’s our job to keep fiscal policy on a sustainable path. And as long as we do that, I don’t think there’s any reason for investors to feel nervous about issuance. And I think –-
EISEN: But are we doing that? Are we on a sustainable path here… 6 percent deficits during a high growth and full employment kind of picture?
YELLEN: Well, the president has signed legislation that brings deficits over 10 years down by a trillion dollars. We have a huge tax gap, that means taxes that are owed that we’re not collecting owing to shortfalls of personnel at the Internal Revenue Service. We’ve achieved funding to boost that. We see greater tax revenues ahead, and the president has made further proposals over the next 10 years to cut two and a half trillion dollars over 10 years from the deficit path. So, we do have a fiscal challenge. Our interest costs have not yet significantly risen. We’ve always expected that average interest rates borrowing costs would rise somewhat over time as we moved out of a period of exceptionally low rates. Now, if the interest rate environment remains very much higher than was expected, we’ll have a slightly tougher job to control deficits, but the president stands ready to work with Congress to take the actions that are needed to do it. And the president’s made proposals in his last budget where we have another one that we’re working on now, both to boost tax revenues back toward more normal levels. I think part of the problem with our deficits, it’s not that discretionary spending is very high as a share of GDP, it’s actually fallen substantially, but rather the tax revenues after the jobs cut and Tax Act of 2017 fell to very low levels, about 16.5 percent of GDP, and—
EISEN: Capital gains too, right?
YELLEN: Yes, there were cuts there as well. And of course, in corporate tax collections as well as individual. And we need to make sure we raise tax revenue. The president has proposals to do that in a way that we believe promotes tax fairness. And at the same time, importantly, when you think about beyond the short-term, think about the medium-term and longer-term trajectory of the economy. What we need to do is expand the productive potential of our economy to focus on the supply side of the economy, to boost growth, to boost productivity. And the president believes it’s important to invest in America to do that. Now, the Republican agenda has always been cut tax rates and deregulate to stimulate private investment. But there are a lot of things that have been ignored, and public infrastructure, the quality of our roads and bridges, whether or not people have access to the internet throughout the country, our airports, creating good jobs in growing sectors of the economy that are critical to our security, energy, semiconductors, addressing climate change and making sure that there are good jobs for people who don’t have a college education and live in parts of the country that have been left behind.
EISEN: Yes.
YELLEN: This is a healthy agenda for the longer run in our economy, and that’s what the Biden agenda has been.
EISEN: Well, are you setting, are you going to try to push tax increases next year? Is that what you’re setting up for?
YELLEN: I think that what we’ve proposed in past budgets and are likely to propose in the next budget is a package of continued investments in America to expand our productive capacity and address long-term structural issues. At the same time, we finance it with higher tax collections by asking that corporations and wealthy individuals pay—
EISEN: Pay more?
YELLEN: Pay their fair share.
EISEN: What about the global economy? Because you expect the soft landing to continue for the U.S. We got a negative growth number out of the U.K. today. What are you expecting from some of the other major economies next year and will it drag us down?
YELLEN: So, I think if you go back a year and look at what forecasts were for most developed countries, actual performance has turned out to be better than was expected. So, while there are problems, inflation is generally coming down in developed countries. And the surprises on the inflation front are, have tended to be positive ones. And we’ve seen rather robust labor markets in, for example, most developed countries, much of Europe. So, while there are problems out there and we’re seeing somewhat slower global growth, all in all, I think things are working out in a better way than we would’ve predicted a year ago.
EISEN: What about geopolitics? The ongoing war in Ukraine, the terrorist attack in Israel and now, war in Gaza, does that have an impact on the economic outlook?
YELLEN: Potentially. Certainly, Russia’s brutal war against Ukraine did have a very significant impact on the global economy. And it led to surging food prices and energy prices that caused inflation. That was not all, but it was part of the inflation bulge. We’ve done our very best working with our allies to address those pressures on both the food and energy fronts. We put in place a price cap to try to both keep Russian oil in global markets, but also to limit Russia’s revenue. And at least for the first year, I feel that that was successful. And oil prices are down considerably. Gas prices are down considerably. But, and we do need to, it’s absolutely urgent, we need to fund Ukraine in its fight against Russian oppression. I’m very focused on that. The Middle East clearly has the potential if it expands to a broader regional to affect the global economy. At this point, we’re focused on the suffering that’s taking place there. Our hearts go out to all of the people who have been affected by this, but we are closely watching what’s happening in terms of economic impacts.
EISEN: And finally, you know, people there have always been rumors, Secretary Yellen, this whole year and last, about how long you would stay at Treasury. You’ve said, I’m here, I’m staying, and you have. Are you staying as secretary through the election?
YELLEN: Absolutely.
EISEN: You’re not going anywhere?
YELLEN: Not going anywhere. Staying. We’ve got a lot of work to do. I’m excited about it. The people in here at Treasury are energized by what we’re doing and what we want to accomplish. We have responsibility for putting out all the regulations that will let businesses address climate issues, improve energy security. We have a rare opportunity to really equip the Internal Revenue Service to be an effective modern agency that can both collect taxes and interact well with consumers. We’re seeing a lot of improvements. I’m very excited by that. We have an international agenda that is very important. I’m not going anyplace.
EISEN: You’re not going anywhere. OK. There’s the headline.
YELLEN: You bet.
EISEN: Secretary Yellen, thank you so much for taking the time today.
YELLEN: Thanks, Sara. Pleasure.
EISEN: Talked on some of the priorities and the hits from 2023 and what to look out for, David, in 2024. Back over to you.
