Treasury Secretary Janet Yellen thinks the Federal Reserve could hit its 2% inflation target in 2025, with a soft landing well in her sights.
Yellen told Yahoo Finance in an interview published Monday that she does “not see the basis” for a U.S. recession, pointing to the Fed’s caution around cutting interest rates too soon to avoid tipping the economy into the red as “the balancing act that they have.”
The Fed has continued to hold rates at a 23-year-high between 5.25% and 5.5% since last July, and has exercised restraint in lowering the benchmark federal funds rate following hotter-than-expected inflation readings in the first quarter of 2024. The central bank has taken a slow and steady approach to interest rates decisions, as it closely watches and waits for consistently positive economic data.
While annual inflation has slowed to 3.3%, it has remained well above the Fed’s 2% target. Following the June Federal Open Market Committee (FOMC) meeting, officials raised their inflation projections from earlier estimates. They now anticipate core prices to increase 2.8% in the fourth quarter from a year earlier, before slowing to 2.3% next year, and finally hitting the 2% target in 2026.
But Yellen sees prices normalizing faster than the Fed is projecting.
“I do expect inflation to come down, and as we get into next year I believe that inflation will go back to the Fed’s 2% target,” she told Yahoo Finance.
Given stubbornly high prices, Fed officials are now forecasting just one interest rate cut in 2024. Federal Reserve Governor Michelle Bowman, however, underscored the Fed’s cautious tone around rate cuts — and said she would be open to raising rates if necessary.
In prepared remarks delivered at the Policy Exchange in London on Tuesday, Bowman said “we are still not yet at the point where it is appropriate to lower the policy rate.”
“I remain willing to raise the target range for the federal funds rate at a future meeting should progress on inflation stall or even reverse,” she said. “Reducing our policy rate too soon or too quickly could result in a rebound in inflation, requiring further future policy rate increases to return inflation to 2% over the longer run.”