Inflation could be headed back to the Fed's 2% target

U.S. Treasury Secretary Janet Yellen said Tuesday she doesn't believe the "last mile" in returning inflation to the Federal Reserve's 2% goal will be especially difficult.

Inflation is "certainly meaningfully coming down," Yellen said Tuesday at a Wall Street Journal CEO Council Summit in Washington, DC. She added that she saw no reason "why inflation shouldn't gradually decline to levels that are consistent with the Fed's mandate and targets."

Yellen's comments come after data published earlier Tuesday showed U.S. consumer prices picked up slightly in November. 

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From a year ago, overall CPI was up 3.1%, while the so-called core consumer price index, which excludes food and energy costs, advanced 4% from a year ago for a second month. Economists favor the core metric as a better gauge of the trend in inflation. 

The latest data underscore the choppy nature of getting inflation back in line and could reinforce the Fed's resolve to keep interest rates elevated in the near term.  

While price pressures have largely retreated from multi-decade highs, a still-strong labor market continues to power consumer spending and the broader economy.

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Data last week showed that the US labor market unexpectedly strengthened in November with pickups in employment and wages. The unemployment rate fell to 3.7% and workforce participation edged up. Monthly wage growth rose more than forecast.

Economy Normalizing

Yellen went further than she has in the past in explaining why she has consistently disagreed with economists who said stifling the post-Covid spike in inflation would require a significant rise in unemployment.

"I've never felt there was a solid intellectual basis for making such a prediction," she said. 

Past periods when such a dynamic was required mostly featured an increase in inflation expectations, she said, which makes high inflation self-perpetuating. 

In this episode, "because inflation expectations had never meaningfully ratcheted up on a long-term basis, we just had to have the economy normalize and get the labor market back to a sort of full-employment state to bring inflation down," she said.

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Yellen declined to comment on how she thought the central bank should finish the job. 

Fed officials begin a two-day meeting Tuesday that is expected to culminate with them holding interest rates steady for the third consecutive time.

Chair Jerome Powell has repeatedly pushed back against growing bets of rate cuts early next year, stressing that policymakers will move cautiously but retain the option to hike again.

Fiscal Stress

Asked whether the U.S. was on a sustainable fiscal path, Yellen repeated earlier comments that she doesn't see it as an urgent issue. Still, she conceded, the debt picture could deteriorate if long-term interest rates remain elevated. 

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"If interest rates are substantially higher on a long-term basis than we previously projected, of course, that results in some extra stress on the fiscal outlook," she said.

She suggested the best way to address that would be, as President Joe Biden has proposed, to raise the tax rate on corporations and high-income households and to ramp up enforcement of existing tax laws.

"Our tax collections, as consequence of the Tax Cuts and Jobs Act in 2017, have fallen to historically low levels," she said, referring to the measure championed by then-President Donald Trump.