Janet Yellen, the US Treasury secretary, conceded she was “wrong” last year about the threat posed by rising inflation, while insisting Joe Biden’s administration has quickly focused its attention on taming soaring prices.
“I think I was wrong then about the path that inflation would take,” Yellen told CNN on Tuesday, in a rare admission of error from a senior US official.
“There have been unanticipated and large shocks to the economy that have boosted energy and food prices and supply bottlenecks that have affected our economy badly that I didn’t — at the time — didn’t fully understand, but we recognise that now,” she added.
Yellen’s remarks came after she attended a meeting at the White House during which Biden told Jay Powell, the chair of the US Federal Reserve, that he would respect the “independence” of the central bank as it moves to tighten monetary policy, effectively giving it a green light to fight inflation with sharply higher interest rates.
Like many private forecasters and the Fed itself, Yellen and White House economists believed the inflation spike of 2021 was related to the rapid recovery triggered by the first round of Covid-19 vaccinations and would fade relatively quickly. It has instead persisted, and even gotten worse in the wake of Russia’s attack on Ukraine.
Biden met with Powell at the White House on Tuesday for the first time since he renominated the Fed chair to a second term in the job, in a sign that the president’s concern about high inflation and the threat it is posing to the economic recovery is growing.
“My plan . . . to address inflation starts with a simple proposition: respect the Fed, respect the Fed’s independence, which I have done and will continue to do,” Biden told Powell as they gathered in the Oval Office.
The president added that he would give Powell and other Fed officials “the space they need to do their job” and “not interfere with their critically important work” of guaranteeing “full employment” and “stable prices”.
Biden chose to reappoint Powell for a four-year stint as head of the Fed last year, bucking progressive calls for him to tap a Democrat for the job rather than a Republican who was elevated to the helm of the central bank by former president Donald Trump. Powell was confirmed by the Senate for a second term on May 13, with bipartisan support.
The president’s pledge not to meddle with the Fed’s decisions was designed to strike a contrast with his predecessor’s approach, in which Trump berated Powell for not lowering interest rates as the US economy slowed because of his trade wars.
But it is unusual for a president to support the Fed in raising interest rates in an election year, with midterm elections due in November which will determine control of Congress. Biden has embraced the monetary tightening because elevated prices have become highly problematic economically and politically for the White House and Democrats. As a result, bringing them down has superseded any concerns that tighter monetary policy would mean a slower economy.
“Chair Powell and other members of the Fed have noted at this moment they have been laser focused on addressing inflation like I am,” Biden said, adding that he was confident monetary policy would “address the crisis for the American people”.
The Fed has raised its main interest rate by 75 basis points this year, to a range between 0.75 per cent and 1 per cent. But it is expected to increase it further, by 50bp at each of its next few meetings, before it reassesses its policies.
Even though the Fed is an independent institution, US presidents have periodically held public and private meetings with sitting chairs of the central bank in order to discuss domestic and international economic developments.
Biden last met Powell in November, when he nominated him for a second term. Trump met with Powell and Yellen, the chairs during his tenure, and Barack Obama invited Yellen and former chair Ben Bernanke to the White House during his presidency.
The meeting with Powell is part of what administration officials are describing as their latest effort to refocus on the economy, with polls showing voters are rebuking his handling of inflation even while job growth has been very strong.
The burden of high inflation, particularly with respect to petrol and food costs, will have been more apparent over the Memorial Day weekend, which is one of the busiest weekends for travel during the year.
Biden and top officials in his administration have insisted that they are using every tool at their disposal to fight inflation, though they are still debating whether to reduce tariffs on Chinese imports in order to reduce some price pressures.
“Talking about the economy and how we can put more money in the pockets of working families will be the key message being driven by the White House all month,” a White House official said on Tuesday.