US treasury secretary Janet Yellen said the US could reach full employment next year if Congress passes Joe Biden’s $1.9tn stimulus package.
Yellen cited a forecast by the Congressional Budget Office that predicted that without additional stimulus the unemployment rate would remain elevated for several years.
The former Federal Reserve chair also responded to criticisms that the hefty stimulus package would trigger inflation, arguing that the biggest risk to the economy was not doing enough to help the unemployed.
The size of the proposed package came under attack this week when Larry Summers, who served as Bill Clinton’s treasury secretary and Barack Obama’s top economic adviser, warned that Biden’s plan might trigger “inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability”.
Yellen said that, while she worried about “all risks to the economy”, the “most important risk” was failing to adequately help workers and not doing enough to address the economic impact of the pandemic.
“We already have way too many small businesses that are closing,” she said on CNN.
“We have people suffering, particularly low-wage workers and minorities and through absolutely no fault of their own. We have to get them to the other side and make sure this doesn't take a permanent toll on their lives. So, we need a package that's big enough to address this full range of needs.”
Addressing Summers’ fears that the package would cause inflation, Yellen conceded that it was “a risk that we have to consider”.
But Yellen, who as former Fed chair oversaw US monetary policy, added: “I've spent many years studying inflation and worrying about inflation. And I can tell you we have the tools to deal with that risk if it materialises.”
The weakness of the US jobs market has been one of the main catalysts for Biden’s drive to pass the stimulus bill. US economic data on Friday showed the economy creating a paltry 49,000 jobs last month as it struggled through the latest surge of coronavirus infections.
Speaking on CBS News, Yellen also emphasised provisions in the rescue package to help women specifically, saying that paid family and medical leave and extra childcare payments would stop women having to leave their jobs to take care of children who were not in school.
Summers’ warnings about the size of the stimulus package prompted a fierce backlash among Democrats. In a briefing with reporters on Friday, Jared Bernstein, a member of Biden’s White House council of economic advisers, said Summers was “flat out wrong” in suggesting the administration was underplaying inflation dangers.
“Janet Yellen is our treasury secretary, OK?” He said referring to the former Fed chair. “She knows a little something about inflationary risks and has tracked that economic issue forever.”
Bernstein said the administration believed it was crucial to “hit back hard” and “hit back strong” with fiscal support and said there was “complete consensus” within the team on the calibration and size of the package.
On Friday, Kristalina Georgieva, managing director of the IMF, said the US needed to be “watchful” of the questions Summers raised. But she added that the US had the “best possible” treasury secretary in Yellen to monitor challenges to financial stability, and indicated broad support for Biden’s plan.
Part of the anger directed at Summers reflects the Biden White House’s desire to avoid repeating the mistakes of the 2008-09 financial crisis, when the US fiscal response was limited in part because President Barack Obama sought Republican support for his policies. Summers led Obama’s National Economic Council at the time.