WHEN: Today, Thursday, September 26, 2024
WHERE: CNBC’s “Squawk on the Street”
Following is the unofficial transcript of a CNBC exclusive interview with United States Treasury Secretary Janet Yellenon CNBC’s “Squawk on the Street” (M-F, 9AM-11AM ET) today, Thursday, September 26. Following is a link to video on CNBC.com: https://www.cnbc.com/video/2024/09/26/secretary-yellen-were-on-a-path-to-a-soft-landing.html.
All references must be sourced to CNBC.
STEVE LIESMAN: David, thanks very much. I am here just a couple blocks away from you at the NYSE with Treasury Secretary Janet Yellen. Thank you for joining us, Madam Secretary.
JANET YELLEN: My pleasure. Thanks for the invitation.
LIESMAN: So we’re here at the Treasury Conference and we’re going to talk, they’re going to be talking about stability. You’re going to give a speech soon—
YELLEN: I am.
LIESMAN: About stability in the market. Some things have seemed to work out right. Are we past the period of time where you have concerns about the balance sheets of banks and their exposure to high interest rates? And then what are the risks that you’re concerned about? You mentioned in your speech stable coins. You mentioned the non-bank financial sector?
YELLEN: Yes. So we want to make sure through our work with the Financial Stability Oversight Council and more broadly that we have a well-functioning financial system that can contribute to growth. With respect to the banking system, I believe it’s well capitalized and we did see risk materialize a year ago. I think we’ve dealt with those successfully. It did show though that a vulnerability is a high level of uninsured deposits in parts of the banking system and inadequate access to the liquidity that’s needed to be able to address deposit runs. The deposit runs were large and very rapid. And so a good deal of thought is going into how to shore up the liquidity, the access to the Fed’s discount window for banks that do have uninsured deposits.
LIESMAN: Are you looking to Congress to guarantee deposits over $250,000? That’s Congress’ mandate now, not something that you can do really broadly under Treasury Federal Reserve mandate.
YELLEN: So I really think this is up to Congress. The FDIC issued a report, discussed some possibilities. This is for Congress. But in terms of access to liquidity, better functioning of the discount window, making sure that banks are prepared to borrow from the discount window quickly, this is something that the banking regulators are working on and discussing.
LIESMAN: If you don’t mind, let’s shift to talk about the economy. Some revisions to GDP this morning. Told us we didn’t have two negative quarters in 2022.
YELLEN: Right.
LIESMAN: Generally upward, gross domestic income came towards GDP, which is obviously a kind of thing only for the wonks in all of us here. Broadly, do you see us heading towards a soft landing? And do you feel like inflation is sufficiently under control?
YELLEN: Well, I do. I think that all of the indications we’re seeing both in the labor market with respect to inflation and with respect to growth suggest we’re on a path to a soft landing. And of course, there are always risks. We are seeing a less tight labor market and some growing, a little bit more slack in the labor market that we had previously. The unemployment rate has drifted up. Still low by historical standards, but hopefully this is going to turn out to be a stable situation with the Fed supporting continued strength in the labor market. And inflation has come down considerably. The last mile on inflation involves housing costs. And I believe there’s good reason to think that they will fall market. Rents have declined considerably. And with the lag, I think we’ll see housing costs fall further and that’ll take the Fed to its 2% target. So I’ve said for a long time, I always believed that there was a path to a soft landing, that it was possible to bring inflation down while maintaining a strong labor market. And to me, that’s what the data suggests has happened.
LIESMAN: OK, so I know you think a lot about the Fed, but I also know you don’t talk a lot about the Fed. So I’ve written a carefully crafted questionnaire to see if you might respond to it. When you think about the level of rates now relative to the progress on inflation, do you think that rates at the Fed are too high?
YELLEN: Well, you do see in the material in the comments of the Chairman and in the projections of the members an expectation that rates will come down more and that short rates are currently above neutral. And when you have an economy that’s growing at potential, that’s operating at full employment with inflation in the vicinity of the Fed’s target, that suggests that a more neutral stance of policy is appropriate. So the Fed has had a policy of running a tight policy to bring inflation down. We’ve seen considerable progress on that front. And yes, I believe over time, if we stay on that path, that rates will decline toward neutral.
LIESMAN: Do you have an opinion about the pace at which they ought to get there?
YELLEN: That’s getting into details.
LIESMAN: Alright.
YELLEN: Clearly, it’s up to the Fed to decide that.
LIESMAN: You talked about potential growth. And there’s something that has been troubling to many market observers, which is that we’re at or above potential. We’re at or near many estimates of full employment, yet we’re running these very large deficits. Can you explain why that is and how the administration justifies these large deficits with the economy doing as well as it seems to be doing?
YELLEN: Well, I think the metric we should be looking at is to decide on the sustainability of fiscal policy is real net interest costs as a share of GDP. And historically, that’s been under 2%. It is under 2%. Over time, if we don’t do further deficit reduction, it would be likely to drift up. So I think looking forward, it will be necessary to get deficits down and to do some deficit reduction in order to keep the interest costs manageable. The president, President Biden and Vice President Harris presented a fiscal 2025 budget that has considerable deficit reduction—
LIESMAN: I get that and I’ve—
YELLEN: Something like $3 trillion over the next 10 years.
LIESMAN: I’ve seen that. But if you can’t get the revenue, isn’t it prudent not to do the spending?
YELLEN: Well, I think it’s important to be on a fiscally sustainable course. And the approach that our administration has taken is that we want to be able to invest in ways that will boost growth and do so in an equitable way, whether it’s investing in industries of the future in places that haven’t had opportunity, addressing housing, childcare, things that have boosted the cost of living and made life very difficult for middle-class families. So we want to invest in the country and be able to do that, afford that by raising enough revenue to be able to pay for those things. And we’ve made some progress. We do have now a corporate alternative minimum tax that went into effect. We’ve started to bring down the cost of pharmaceuticals, which both lowers the cost of living for families and also saves the government considerable amounts of money. And importantly, we’ve boosted the resources of the Internal Revenue Service so they can both improve customer service. And I think anybody who’s dealt with the IRS over the last year or two can see that, but also begin to close the tax gap, which is the enormous gap between the revenues that are being collected and what was estimated to be due.
LIESMAN: All of that said, Madam Secretary, do you regret over the course of the pandemic and its aftermath, given what happened to inflation, not having reduced spending so that you weren’t adding to that inflation?
YELLEN: Look, I think at the outset of the administration, we felt that the largest single risk facing our economy was that people would not get back to work in a timely way. And we could be faced with a real crisis of high unemployment with substantial scarring. And we put in place with Congress, a program that was meant to address that risk. Every developed country saw a surge in inflation. Ours was no worse than other countries experienced. Inflation has come down more quickly and we’ve had a more robust recovery than other countries. So there’s no question that inflation has been a problem. It remains the top priority of our administration to address the high cost of living that burdens households. But inflation now is down considerably and real wages, wages adjusted for inflation, are rising so that families are getting ahead.
LIESMAN: You mentioned in your speech the risk of China and the importance of having a positive relationship with China or at least building on that relationship. Yet over the course of this administration you have kept the tariffs put in place by former President Trump and you’ve actually added to them. Do you believe that that relationship has gotten closer?
YELLEN: I do believe it’s gotten closer. I think we’ve deepened our ties with China. We’ve found ways to constructively discuss and address our differences. I don’t want to say that there will be some miracle in which we see China address all of our concerns quickly but we have had productive discussions of our differences so that we better understand one another and we’re cooperating in areas that the world needs us to work together. Financial stability is one of these areas and for example if we were to, God forbid, see a globally systemically important bank, a G-SIB, fail—
LIESMAN: Right.
YELLEN: That has operations in China and the U.S. and Europe, we would need to be able to cooperate and we are working closely with financial authorities in China doing tabletop exercises and deepening our ties so that we would be able to work constructively and quickly to manage a financial crisis that involved the banks in the financial system in our countries.
LIESMAN: Madam Secretary, just a last question. I’ve been interviewing Treasury Secretary since the 1990s and I’ve never not asked about the dollar. When you wake up in the morning, do you look at the dollar? How do you think about the dollar? It’s weakened recently with Federal Reserve rate cuts. Do you think about it in a range? How much concern do you have for the value of the dollar versus other currencies?
YELLEN: So at the beginning of our administration, I tried to articulate what the U.S. dollar policy is and what I said is that we believe in a market-based currency, that the value of the dollar should be determined in markets, that we should run a strong macroeconomic policy consistent with macroeconomic stability, price stability, and full employment in the United States and allow the dollar to adjust as necessary to accomplish those goals. So of course I watch the value of the dollar, but it’s been a long time since the United States has intervened in currency markets, can imagine situations where markets are so disorderly that intervention is called for. But as a normal matter, the dollar is determined by markets and interest rate differentials globally have been important drivers of that.
LIESMAN: Do we need a central bank digital currency?
YELLEN: This is something the Fed has been looking at. We’ve been studying as well. There are pros and cons and we’re also looking at alternative approaches. We have a good new fast payment system. We’re looking at ways to facilitate and reduce the frictions in cross-border payments. There are many international discussions taking place about ways to improve the efficiency of the payments system and it could one day involve a central bank digital currency, but there are other approaches as well.
LIESMAN: Madam Secretary, we’ve taken more time than agreed, but thank you very much for joining us.
YELLEN: My pleasure.
LIESMAN: And giving us your time.
YELLEN: Thanks.
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