Yellen Admits Inflation Might Get Worse, but Has ‘Confidence’ It'll Eventually Get Better

U.S. Treasury Secretary Janet Yellen testifies during a House Ways and Means Committee hearing on President Biden's proposed 2023 U.S. budget, on Capitol Hill, on June 8, 2022. (Jonathan Ernst/Reuters)

Secretary of the Treasury Janet Yellen said Monday that she’s confident that price pressures will ease “over the next year or two,” while leaving open the possibility that in the near term inflation could become even worse.

Yellen made the remarks during an interview on NBC News, released on Oct. 24, in which she said there are “good indications” that inflation will eventually drop, but she’s “not positive” that it won’t get worse before it gets better.

“I’m not positive,” she said, replying to a question from Stephanie Ruhle, the senior business analyst for NBC News, who asked whether inflation has already peaked.

“I don’t want to forecast month-by-month inflation numbers,” Yellen continued. “The most recent data suggest we still have inflation that’s unacceptably high, but there are good indications earlier in the pipeline that inflation will come down.”

“I have confidence that inflation will come down over the next year or two, so I believe that what [the Federal Reserve is] doing will work,” she added.

Inflation Expectations Edge Up

Yellen’s remarks came as U.S. inflation expectations ticked up on Monday, according to data about the five- and 10-year breakeven inflation rates from the Federal Reserve Bank of St. Louis.

Both of the proxies for the forward-looking inflation rate jumped to roughly a two-month high.

The 10-year inflation expectations rose to 2.59 percent on Monday, the highest level since Aug. 24, 2022. The five-year benchmark jumped to 2.72 percent, matching the high on Aug. 26, 2022.

With inflation running near multi-decade highs, the Federal Reserve has embarked on an aggressive monetary policy-tightening cycle, with markets pricing in another big 75 basis-point hike in November.

Signs of Slowdown

The economy is showing signs of slowing as the Fed hikes rates to cool demand and bring inflation back to the central bank’s target of 2 percent.

S&P Global said on Monday that its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, fell to 47.3 this month from a final reading of 49.5 in September. Readings below 50 indicate business activity contraction.

Except for the slump during the first wave of the COVID-19 pandemic in the spring of 2020, business output is now retreating at the fastest pace since the global financial crisis of 2008–09, according to S&P Global data.

“The U.S. economic downturn gathered significant momentum in October, while confidence in the outlook also deteriorated sharply,” said Chris Williamson, S&P’s chief business economist, in a statement.

“The decline was led by a downward lurch in services activity, fueled by the rising cost of living and tightening financial conditions.”

During the interview on NBC, Yellen said she can’t rule out the possibility of a recession, but added that she believes “there is a path to reducing inflation” without doing too much damage to the job market.

While the U.S. economy added 263,000 jobs and the national unemployment rate fell to 3.5 percent last month, the labor force participation rate has remained depressed by historical standards.

The labor force participation rate, which reflects the percentage of working-age adults looking for work or working, came in at 62.3 percent in September, well below the pre-pandemic level of 63.4 percent.