Global Courant 2023-04-17 07:43:48
U.S. Treasury Secretary Janet Yellen speaks at a press conference at the Treasury Department in Washington, U.S., April 11, 2023.
Elisabeth Frantz | Reuters
US Treasury Secretary Janet Yellen said banks are likely to become more cautious and tighten lending further in the wake of recent bank failures, potentially negating the need for further rate hikes by the Federal Reserve.
Yellen said in a CNN interview with “Fareed Zakaria GPS” that policies to address the systemic threat posed by last month’s Silicon Valley Bank and Signature Bank failures had stabilized deposit outflows, “and the business has been calm,” said a transcript released Saturday.
“Banks are probably going to be a bit more cautious in this environment,” Yellen said in the interview, which will air on Sunday. “We already saw some tightening of credit standards in the banking system prior to that episode, and more may follow.”
She said this would lead to a credit squeeze in the economy that could “substitute for further rate hikes the Fed needs to make.”
But Yellen said she didn’t see anything “dramatic or significant enough” in this area yet to change her economic outlook.
“So I think the outlook remains one of moderate growth and (a) continued strong labor market with declining inflation,” she said.
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Yellen is far from the only finance official to expect a cut in bank lending following the turmoil in the financial sector over the past month. Some Fed officials have said the US central bank needs to be more cautious as they expect banks to limit lending in the coming months.
Weekly bank balance sheet data released by the Fed has yet to show any material deterioration in bank lending, while also showing that deposit outflows have stabilized over the past two weeks after an initial stream of withdrawals around the time of the SVB and the signature bankruptcy in mid-March.
In response to deposit safety concerns, Yellen was asked if it would be prudent to develop a central bank digital currency that would allow U.S. consumers to hold accounts directly with the Fed.
“There are important benefits … and there are some drawbacks to such a decision, so it’s one that needs serious analysis, but it could be something that’s in Americans’ future,” Yellen said.
Dominance of the dollar
Yellen also told CNN that US-led sanctions and export controls against Russia deprived the country of material for its war in Ukraine and that the $60 per barrel price cap imposed by Western countries on Russian oil turned Moscow’s projected budget surpluses into deficits.
The sanctions and export controls have forced Russia to turn to Iran and North Korea for military equipment and supplies and the US took steps to curb sanctions evasion, Yellen said.
“But we think his (President Vladimir Putin’s) army is really short of the equipment they need to go to war,” she added.
When asked whether sanctions could erode the dollar’s role as the world’s reserve currency, Yellen acknowledged potential risks.
“So there is a risk when we use financial sanctions related to the role of the dollar that over time it could undermine dollar hegemony, as you said. But this is an extremely important tool that we are trying wisely to use.”, 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 this 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 for transactions worldwide,” said Yellen. “And we have not seen any other country that has the basic infrastructure – institutional infrastructure – that allows its currency to serve the world in this way.”
