Janet Yellen, the outgoing U.S. Treasury Secretary, expressed concerns about President-elect Donald Trump’s proposed import tariffs and the potential negative impact on inflation, household costs, and business expenses. Speaking at a Wall Street Journal CEO Council event, Yellen also highlighted worries about U.S. fiscal sustainability and the need for Congress to address the expiring 2017 tax cuts.
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Trump’s Tariff Proposals and Inflationary Risks
Yellen warned that Trump’s plan to impose substantial tariffs – 60% on Chinese imports and 10% to 20% on goods from other countries – could significantly increase prices for American consumers and create cost pressures for businesses. She argued that such tariffs could harm the competitiveness of certain U.S. economic sectors and potentially undo progress made in controlling inflation.
“This is a strategy I worry could derail the progress that we’ve made on inflation and have adverse consequences on growth,” Yellen stated. The proposed tariffs could disrupt supply chains, leading to higher production costs and ultimately impacting consumer prices.
Fiscal Sustainability and the 2017 Tax Cuts
Beyond trade policy, Yellen addressed the looming issue of U.S. fiscal sustainability. She pointed out that extending all expiring provisions of the 2017 Tax Cuts and Jobs Act would add a staggering $5 trillion to U.S. deficits over the next decade. Yellen urged Congress to identify offsetting measures to prevent a dramatic increase in the national debt.
The recently concluded 2024 fiscal year saw a $1.83 trillion budget deficit, the highest outside the COVID-19 pandemic period. This was largely driven by debt interest costs exceeding $1 trillion for the first time.
“I am concerned about fiscal sustainability,” Yellen admitted, emphasizing the need to reduce the deficit, particularly in the current environment of rising interest rates. Higher interest rates increase the cost of borrowing, further exacerbating the debt burden.
Yellen’s Advice to Successor and Fed Independence
Yellen confirmed a conversation with Scott Bessent, Trump’s nominee for Treasury Secretary. She described discussing the department’s wide-ranging responsibilities, encompassing economic and tax policy, as well as international relationships. Yellen highlighted the Treasury’s dedicated and highly skilled staff, emphasizing their analytical capabilities and commitment to integrity.
She also underscored the importance of an independent and non-political Federal Reserve. While acknowledging Trump’s right to comment on Fed policy, Yellen contrasted this with the recent practice of Democratic administrations refraining from such commentary. She praised the Fed’s increased transparency and communication, which have helped insulate it from political influence.
“I think it’s a mistake to become involved in commenting on the Fed and certainly taking steps to compromise its independence,” Yellen cautioned. Such actions, she argued, could undermine market confidence and public trust in this crucial institution. Maintaining the Fed’s independence is vital for ensuring long-term economic stability.
Conclusion: Navigating Economic Challenges Ahead
Yellen’s remarks highlight critical economic challenges facing the incoming administration. The potential inflationary pressures from proposed tariffs and the need to address long-term fiscal sustainability require careful consideration. Her emphasis on the importance of a non-political Federal Reserve underscores the need to protect its independence for the benefit of the U.S. economy. Addressing these complex issues will be crucial for fostering sustainable economic growth and maintaining stability in the years ahead.
