Yellen defends Biden's massive stimulus bill, despite sky-high inflation

Yellen defends Biden’s massive stimulus bill, despite sky-high inflation

Treasury Secretary Janet Yellen on Thursday defended President Biden’s nearly $2 trillion COVID-19 stimulus bill despite criticism that the burst of government spending helped accelerate the highest inflation in 40 years.

Yellen has helped the White House sell the $1.9 trillion American Rescue Plan, which pumped money directly to households, businesses and local governments to keep them afloat during the COVID-19 pandemic as the government ramped up vaccine distribution. 

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“These responses played major roles in igniting a robust recovery,” Yellen said in a speech Thursday in Washington. “Notably, the American Rescue Plan played a central role in driving strong growth throughout 2021, with the United States real GDP growth outpacing other advanced economies and our labor market recovering faster relative to historical experience.” 

Treasury Secretary Janet Yellen speaks during a Senate Banking Committee hearing on Capitol Hill in Washington Nov. 30, 2021. (AP Photo/Andrew Harnik / AP Newsroom)

Yellen’s comments come as Americans wrestle with the hottest inflation since 1981, which has quickly eroded consumers’ purchasing power and sent President Biden’s approval rating tumbling. 

The White House has identified the Russian war in Ukraine, supply chain bottlenecks and other pandemic-induced disruptions in the economy for the recent price spikes, while GOP lawmakers have pinned it on the president’s massive spending agenda. But the rising price of everyday goods is eating into worker pay, slowing the U.S. economic recovery and forcing the Federal Reserve to aggressively tighten monetary policy. 

Yellen argued that the alternative to huge government spending was an economic downturn that “could match the Great Depression.” 

“Given this uncertainty, the recovery packages sought to protect against tail risk,” she said. “They were not just tailored to address the median outcome.”

People shop for groceries at a supermarket in Glendale, Calif., Jan. 12, 2022. (Robyn Beck/AFP via Getty Images) / Getty Images)

Still, a recent Federal Reserve Bank of San Francisco analysis points to massive government spending during the pandemic as the reason for U.S. inflation surging more than in other developed economies. 

“Fiscal support measures designed to counteract the severity of the pandemic’s economic effect may have contributed to this divergence by raising inflation about 3 percentage points by the end of 2021,” wrote Òscar Jordà, Celeste Liu, Fernanda Nechio and Fabián Rivera-Reyes in the San Francisco Fed’s weekly Economic Letter.

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Federal Reserve Chair Janet Yellen removes her glasses as she testifies on Capitol Hill in Washington July 12, 2017, before the House Financial Services Committee. (AP Photo/Jacquelyn Martin / AP Newsroom)

There is now growing fear on Wall Street that a recession is looming in the next two years as a result of the Russian war in Ukraine, soaring inflation and an increasingly hawkish Federal Reserve. With the consumer price index at a 40-year high, the U.S. central bank is moving quickly to raise rates in an effort to cool demand. 

Goldman Sachs, Bank of America and Deutsche Bank are among the firms that have predicted an economic downturn in coming years.

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