WASHINGTON, April 26 — US Treasury Secretary Janet Yellen told Reuters yesterday that US economic growth was likely stronger than suggested by weaker-than-expected data on first-quarter output and said the Biden administration was keeping all options open to respond to threats from China’s excess industrial capacity.
In a wide-ranging Reuters Next interview, Yellen also said that a US proposal for using the interest earnings from US$300 billion in frozen Russian assets to aid Ukraine could win broad support from G7 allies.
Yellen said US GDP growth for the first quarter could be revised higher after more data is in hand and inflation will ease to more normal levels after a clutch of “peculiar” factors held the economy to its weakest showing in nearly two years.
“The US economy continues to perform very, very well,” Yellen said in an interview with Reuters, responding to the Commerce Department’s report showing that US gross domestic product grew at a 1.6 per cent annualised rate last quarter.
That was below the 2.4 per cent estimated by economists and less than half the pace in the fourth quarter of 2023 — thanks to substantial drags from trade and private inventories. The report also showed a worrisome surge in inflation, with the personal consumption expenditures (PCE) price index excluding food and energy rising at a 3.7 per cent annual rate after a 2.0 per cent pace in the fourth quarter of 2023.
Yellen downplayed the inflation jump and said she did not see that as indicating that unemployment needed to increase or other areas of the economy needed to cool to return inflation to the Fed’s 2 per cent target.
“The fundamentals here are in line with inflation continuing back down to normal levels,” Yellen said.
Fighting inflation remained President Joe Biden’s top priority, Yellen said, highlighting his administration’s efforts to reduce healthcare, energy and housing costs. But Biden, a Democrat, has struggled to translate US economic strength into voter support ahead of the November presidential election.
Republican challenger Donald Trump led Biden by seven percentage points in a recent Reuters/Ipsos poll when voters were asked which candidate would be better for the economy.
“What I focus on most is the strength of consumer spending and investment spending,” Yellen said. “Those two elements of final demand came in in line with last year’s growth rate ... so this is the underlying strength of the US economy that showed continuing robust strength.”
“The headline figure was off a little bit but for reasons that are peculiar and not really indicative of underlying strength,” she added.
Indeed, a number of private economists said the GDP data likely overstated any weakness in an economy that had grown at above the rate most see as its potential for nearly two years, despite aggressive interest rate hikes over that span by the US Federal Reserve aimed at quashing inflation.
Yellen said dollar strength has been another byproduct of US growth and tight monetary policy. She acknowledged that this has put some pressure on other countries, but said currency interventions should occur only in “very rare and exceptional circumstances,” when markets are disorderly with excessive volatility.
She declined to comment on the Japanese yen’s value when asked whether it was out of line with fundamentals. Last week, the US, Japan and South Korea agreed to consult closely on currencies, acknowledging concerns from Tokyo and Seoul over their currencies recent sharp declines against the dollar.
China overcapacity
Yellen told Reuters no option was “off the table” for dealing with one threat to the US economy — overproduction in China, which was hurting manufacturers in numerous countries.
She said that while Chinese policymakers have acknowledged they have a problem with excess industrial capacity for electric vehicles, solar panels and other clean energy goods, they need to address it. The issue was “discussed intensively” last week at a US-China meeting on the sidelines of the International Monetary Fund and World Bank spring meetings in Washington, she said.
Asked about potential for new tariffs or other actions to protect US producers from an expected flood of Chinese exports, Yellen said she would not eliminate any options as a possible response.
She said Chinese overproduction threatens the viability of manufacturers in the US, Europe, Japan, Mexico and India but the problem won’t be resolved “in a day or a week.”
“So it’s important that China recognise the concern and begin to act to address it,” Yellen said. “But we don’t want our industry wiped out in the meantime, so I wouldn’t want to take anything off the table.”
The Biden administration is completing a review of the “Section 301” unfair trade tariffs on Chinese imports imposed by former President Donald Trump in 2018, which US officials have said could lead to higher tariffs on some products. Biden last week called for the review to triple the Section 301 duties on Chinese steel to 25 per cent.
US Trade Representative Katherine Tai also told senators that the US needed to take “early action, decisive action” to protect the fledgling American EV sector from Chinese imports. US tariffs on Chinese vehicle imports are now about 27.5 per cent, and few Chinese EVs are sold in the US at the moment.
Russian asset plans
Yellen said that a proposal under discussion by finance ministers from the Group of Seven (G7) industrial democracies to harness earnings from frozen Russian central bank assets to aid Ukraine can be achieved without an outright confiscation of those assets, allaying the concerns of some countries.
Yellen welcomed what she called a “very constructive step” taken by the European Union to segregate the proceeds from assets held by Brussels-based Euroclear and transfer them to Ukraine, noting future interest could also be pulled forward to back loans to Ukraine.
“This is an approach that could be broadly supported by countries that are concerned about the seizure of assets, and some of the interest could be brought forward through, for example, a loan,” Yellen said.
Yellen said the approach was among several options being discussed by G7 countries ahead of a leaders summit in June, adding, “it certainly belongs on the list.”
The US approach, led by deputy national security adviser Daleep Singh, is gaining momentum among the G7 nations, two officials from the group told Reuters earlier yesterday.
Most of the Russian assets held by Euroclear have now been converted to cash, Yellen told Reuters. G7 officials say the assets could generate around US$5 billion a year in interest. — Reuters
