WASHINGTON — At her confirmation hearing in early 2021, Treasury Secretary Janet L. Yellen told lawmakers that it was time to “act big” on a pandemic relief package, playing down concerns about deficits at a time of perpetually low interest rates and warning that inaction could mean widespread economic “scarring.”
A year and a half later, prices are soaring and interest rates are marching higher. As a result, Ms. Yellen’s role in crafting and selling the $1.9 trillion American Rescue Plan, which Congress passed in March of last year, is being parsed amid an intensifying blame game to determine who is responsible for the highest rates of inflation in 40 years. After months of pinning rising prices on temporary supply chain problems that would dissipate, Ms. Yellen acknowledged last week that she had gotten it “wrong,” putting the Biden administration on the defensive and thrusting herself into the middle of a political storm.
“I think I was wrong then about the path that inflation would take,” Ms. Yellen said in an interview with CNN, adding that the economy had faced unanticipated “shocks” that boosted food and energy prices.
Republican lawmakers, who have spent months blaming President Biden and Democrats for rising prices, gleefully seized upon the admission as evidence that the administration had mismanaged the economy and should not be trusted to remain in political control.
The Treasury Department has scrambled to clarify Ms. Yellen’s remarks, saying her acknowledgment that she misread inflation simply meant that she could not have foreseen developments such as the war in Ukraine, new variants of the coronavirus or lockdowns in China. After a book excerpt suggested Ms. Yellen favored a stimulus package smaller than the $1.9 trillion that Congress approved last year, the Treasury released a statement denying that she had urged more spending restraint.
At this tenuous moment in her tenure, Ms. Yellen is expected to face tough questions on inflation when she testifies before the Senate Finance Committee on Tuesday and the House Ways and Means Committee on Wednesday. The hearings are ostensibly about the president’s budget request for the 2023 fiscal year, but Republicans are blaming Mr. Biden’s policies, including the $1.9 trillion stimulus package, for high prices for consumer products, and Ms. Yellen’s comments have given them grist to cast his first term as a failure.
“How can Americans trust the Biden administration when the same people that were so wrong are still in charge?” said Tommy Pigott, rapid response director for the Republican National Committee.
Understand Inflation and How It Impacts You
The glare is particularly uncomfortable for Ms. Yellen, an economist and former chair of the Federal Reserve, who prides herself on giving straight answers and staying above the political fray.
In recent weeks, Ms. Yellen has had to defend the Biden administration’s economic policies even as fault lines have emerged within the economic team. She has expressed reservations about the lack of progress in rolling back some of the Trump administration’s China tariffs, which she views as taxes on consumers that were “not strategic,” and she has been reluctant to support student debt forgiveness proposals, which could further fuel inflation if people have more money to spend.
Over the weekend, Ms. Yellen came under fire again after an excerpt from a forthcoming biography of her indicated that she had sought unsuccessfully to pare down the pandemic aid bill because of inflation concerns. The Treasury Department released a rare Saturday statement from Ms. Yellen denying that she argued that the package was too big.
“I never urged adoption of a smaller American Rescue Plan package,” she said, insisting that the funds have helped the United States economy weather the pandemic and the fallout from Russia’s war in Ukraine.
Throughout the last year, Ms. Yellen has been an ardent public defender of the Biden administration’s economic agenda. She has clashed publicly at times with critics such as Lawrence H. Summers, a former Treasury secretary, who warned that too much stimulus could overheat the economy.
For months, Ms. Yellen — and many other economists — talked about inflation as “transitory,” saying rising prices were the result of supply chain problems that would dissipate and “base effects,” which were making the monthly numbers look worse in comparison with prices that were depressed during the early days of the pandemic.
By May of last year, Ms. Yellen appeared to acknowledge that the Biden administration’s spending proposals had the potential to overheat the economy. She noted at The Atlantic’s Future Economy Summit that the policies could spur growth and that the Fed might have to step in with “modest” interest rate increases if the economy revved up too much.
“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy,” Ms. Yellen said.
But economic indicators still suggested that inflation remained under control through much of that spring. In an interview with The New York Times last June, Ms. Yellen said she believed that inflation expectations were in line with the Federal Reserve’s 2 percent target and that while wages were increasing, she did not see a “wage price spiral” on the horizon that could cause inflation to become entrenched.
“We don’t want a situation of prolonged excess demand in the economy that leads to wage and price pressures that build and become endemic,” she said, adding that she did not see that happening.
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What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
In the ensuing months, as prices kept rising, Ms. Yellen acknowledged that supply chain problems for items such as chips — which are crucial for a variety of products, including cars — were worse than she had originally realized. She began to project that inflation could last well into this year.
“I am ready to retire the word transitory,” Ms. Yellen said at a December event sponsored by Reuters, noting that new virus variants had muddled the economic outlook. “I can agree that that hasn’t been an apt description of what we are dealing with.”
Jerome H. Powell, the Fed chair, had just days earlier signaled that the Fed would stop using that word to describe inflation, showing that Ms. Yellen was not out of line with other key economic policymakers.
Although some Republicans have called for Ms. Yellen’s resignation, Democrats outside and inside the Biden administration have in the last week come to her defense.
Mr. Summers said on CNN last week that Ms. Yellen had been echoing the views of most mainstream economists last year when she played down inflation and that those incorrect projections called for a rethinking of economic models.
“The consensus didn’t see the overheating risk,” Mr. Summers said. “I’ve been wrong plenty of times in my life, but I did see that there was very substantial demand pressure that was building and it seemed plausible given that that there would be bottlenecks.”
Brian Deese, the director of the White House’s National Economic Council, dismissed the suggestion that Ms. Yellen could be sidelined as the administration looks to shift how it communicates about the economy.
“Secretary Yellen is our chief spokesperson on the economy,” Mr. Deese told Fox News last week. “That will continue to be the case, as has been the case.”