U.S. Treasury Secretary Janet Yellen speaks during a press conference at the Treasury Department in Washington, U.S. April 11, 2023.
Elizabeth Frantz | Reuters
United States Treasury Secretary Janet Yellen said banks are likely to become more cautious and could tighten lending further in the wake of recent bank failures, possibly negating the need for further interest rate hikes from the Federal Reserve.
Yellen said in a CNN “Fareed Zakaria GPS” interview that policy actions to stem the systemic threat caused by last month’s failures of Silicon Valley Bank and Signature Bank had stabilized deposit outflows, “and things have been quiet,” according to a transcript. released on Saturday.
“Banks are likely to get a little more cautious in this environment,” Yellen said in the interview, which is expected to air on Sunday. “We have already seen some tightening of lending standards in the banking system before this episode, and there may be more to come.”
She said it would lead to a credit crunch in the economy that “could substitute for further interest rate hikes that the Fed needs to make.”
But Yellen said she still doesn’t see anything “dramatic enough or significant enough” in this area to alter her economic outlook.
“So I think the outlook remains for moderate growth and (a) still strong labor market with falling inflation,” she said.
Yellen is far from the only finance official to expect some reduction in bank lending following the upheaval in the financial sector over the past month. Some Fed officials said the US central bank should take a more cautious stance as they expect banks to restrict lending in the coming months.
Weekly bank balance sheet data released by the Fed has yet to show a significant deterioration in bank lending, while showing that deposit outflows have stabilized over the past two weeks after an initial wave of withdrawals amid bankruptcies. of SVB and Signature in the middle -March.
Yellen was asked, following concerns over deposit security, whether it would make sense to develop a central bank digital currency that would allow US consumers to have accounts directly with the Fed.
“There are significant upsides … and there are downsides with such a decision, so it’s a decision that needs to be seriously considered, but it could be something about the future of Americans,” Yellen said.
Yellen also told CNN that U.S.-led sanctions and export controls on Russia are depriving it of material for its war in Ukraine and that the country’s $60-a-barrel cap on Russian oil western countries transformed the budget surpluses expected from Moscow into deficits.
Sanctions and export controls have forced Russia to rely on Iran and North Korea for military equipment and supplies, and the United States has taken steps to limit sanctions evasion, it said. Yellen said.
“But we think his (President Vladimir Putin’s) army really lacks the equipment it needs to wage war,” she added.
Asked whether sanctions could erode the dollar’s role as a global reserve currency, Yellen acknowledged the potential risks.
“So there’s a risk when you use financial sanctions that are tied to the role of the dollar, that eventually it could undermine the hegemony of the dollar, as you said. But it’s an extremely important tool which we try to use wisely,” Yellen said, adding that sanctions are most effective when used with the support of allies.
The sanctions create a desire on the part of China, Russia and Iran to find an alternative to the dollar, but it is “not easy” to achieve due to its unique properties of being backed by the safest and most liquid assets in the world – US Treasuries.
“Dollars are widely used. We have very deep capital markets and rule of law that are essential in a currency that will be used globally for transactions,” Yellen said. “And we haven’t seen any other country that has the basic infrastructure – the institutional infrastructure – that would allow their currency to serve the world like that.”