Janet Yellen, U.S. Secretary of the Treasury, 
Alan Murray, Chief Executive Officer, FORTUNE

CEO Initiative 2023: The US Economic Outlook

Conferences

We, we told you we had a cellar uh program today. Our next guest certainly uh uh fits that description. She has a string of first uh uh next to her name, the first woman to become Secretary of the Treasury, the first woman to become uh chair of the Federal Reserve. Janet Yellen also recently said that she believes something. All of you will be glad to hear the economy remains strong. The much predicted recession doesn't seem to be happening uh And uh inflation appears to be going down. She joins us today to talk about all of that, the path ahead for the US economy. We can get her to talk about A I productivity. Uh Please welcome her to the stage, Treasury Secretary Janet Yellen. So good to see you. Thank you really, really appreciate you being here. So we had a wild weekend. You had a wild weekend. We're waiting to see whether the government would stay open or shut, shut down. And, and really all that happened was they kicked the ball down the road 45 days and moody's is threatening to, to uh to downgrade us debt. So I guess the first question for you is, is this mess going to change the relative optimism you had about the US economic outlook. Uh Look, I'm very optimistic about the US economic outlook. Short term inflation is coming down in the context of an extremely strong labor market, what people would normally call a soft landing, um which is amazing by the way, it hardly ever happens. Correct. And um it, it's great because of course, we want to see inflation come down. It's been burdening Americans, but we want to maintain the good, strong labor market that we have and we seem to be on that kind of path and medium term. Um We are now engaging in a very substantial program of investments to strengthen our economy, to boost our productive capacity, to boost productivity growth, to draw more American workers into the labor market and to address long standing structural problems like climate change and inequality across people, races and places. II, I want to talk about that. But before I do, I suppose I should let this group in on a little secret about our past. Yeah, which, which I hesitate to do because it, it, it highlights uh my age and may then also highlight your age. Uh But, but uh I have a master's degree in economics which I got at the London School of Economics for which was the one year that Secretary Yellen taught there. So she, she taught what little I know about macroeconomics. I learned from Janet Yellen and honored to have you and I have, I have wonderful memories of you drawing Isl M Curves and Philip on that big blackboard. Uh So, so I, I asked this question with that in mind, the people who almost hung us up this weekend are concerned about government spending. We have a budget deficit of $1.5 trillion. If I had said to you back when we were at the London School of Economics that we were going to end up in that place. I think you would have used your curves to show me that's not a good scenario. So how is it that? That's ok. OK. That's a great question. And as treasury secretary, I feel it's my job to worry about fiscal sustainability. So I do think it's critical that we establish spending and revenue targets that put us on a path where fiscal policy is sustainable and a path that's consistent with solid, solid growth. And um I believe at the moment we're on such a path. So one way to judge it because our economy is now all about big numbers and a trillion is certainly a big number. But um our economy has a large GDP and so forth. I think the metric that I think is most relevant to judging fiscal sustainability is the amount that we're spending to service the debt, real net interest payments as a share of GDP. How much of our GDP goes to service the debt and the answer um over the next 10 years in the mid session review, which is the most recent budget forecasts that the administration prepared. The answer is 1%. So real net interest is the share of GDP is about 1%. That's historically completely normal. Um Some guidelines would say try to keep it under 2% but it's 1% for the next decade. Now, I will say that that budget does assume de meaningful deficit reduction over the next 10 years. There were three trillion of deficit reduction incorporated into it along with a significant program of investments in our economy. But ones that are financed by collecting greater revenues in a way that we think is fair where the burden largely falls on corporations and very high income taxpayers. And I do want to come back to the investment piece of it. But before I do, I mean, the other thing that, that assumption depends on is how high, how long to uh to interest rates stay, which is a big issue, not just for the government, but for any company that's carrying a substantial amount of debt. How long, how long are we going to, you know, are we gonna have to roll over all our debt at rates that are double what we initially had? So that's so, so tell them the answer. The answer is, I don't know. And um it, it's a great, it's a great question and it's one that's very much on my and the administration's minds. Um, you know, when the administration came in, it was the pandemic, we had, had, um, a decade of interest rates, short term interest rates were zero, long term interest rates higher, but very much lower than today's interest rates. And the interest burden was, um, almost nonexistent at that point. Now, the forecasts we've made assume that, uh, interest rates will rise to more normal levels. But we are seeing especially over the last several months, a pretty significant increase in not only 10 year nominal yields but also real yields. And uh there's a question mark just why that is um why going back to something that looks more like the history prior to 10 years ago than the last 10 years? That's right. And that's a very, I mean, that's a very important question. One view is that it may take a longer period of somewhat higher interest rates to control inflation to keep it down. But medium term interest rates will go back to more normal levels. It's also possible that um longer term interest rates will be higher than we thought. But I would point out that for many decades, the level of real interest rates, not only in the United States, but in many advanced economies had been moving down and it was felt by most economists that there were strong structural reasons why that was occurring, you know, this is why I loved you as a teacher way back when, because you could explain to the both sides of the equation. But what do you think, give us, do you think we're going to go back to extraordinarily low interest rates or do you think we're going to be living with this for a long time? So I think the structural forces that led us to believe interest rates would be low, they're alive and well. And we're talking about aging population, nations high propensities to save globally weak investment opportunities. Now, you know, there are a lot of investment opportunities associated with climate change. You could imagine a world where we get very serious about um investment in um in climate related investments. And if investment were generally stronger, both private and government that could push up real interest rates, I'm not sure we're on that path. Although in the United States, we are seeing, we're seeing full increase and I am going to get to that, I promise. But the other thing we've been talking about here today is the extraordinarily quick adoption of generative A I technology. I think Eric Brinson said earlier that most ways of technology take like 10 years before you start to see him in the productivity numbers. He thinks this one is going to be much faster. We've seen, we've heard lots of anecdotal evidence of huge productivity gains. If I studied my books correctly, way back then uh big increases in productivity could make a huge difference to all the things we're talking about growth, inflation, et cetera. Do you think we're on the verge of a, we've had disappointing productivity for the last decade? Are we on the verge of something significantly better? So I will say I'm not an expert in A I um from what I understand, as you just said, the progress in this area is unbelievably rapid and I think it could make a significant difference is an administration as a country. We're also working on a whole set of investments that should be productivity boosting over the medium term. We're addressing the problem of crumbling roads and highways and an infrastructure that really hasn't been appropriately appropriately designed for a modern economy. Um We have a huge, you know, we passed really a trifecta of legislation, the bipartisan infrastructure bill, the Chips and Semiconductor Act and then the Inflation Reduction Act. Um So we're investing in R and D um in ways we haven't in decades, uh restoring us leadership in science and technology. Um We, we have a huge program of incentives. So you're betting on a significant increase in productivity. Yes, but let me be careful because productivity growth usually 1/10 or two here or there is regarded as a big, a big thing. So I don't wanna pull numbers out of a hat that are gigantic. Um I think there will be a payoff, but I don't want to exaggerate it. So, so let's talk about the investment agenda. You, because you've focused on it, investment of infrastructure, obviously, that's important to the economy needs to happen. And kudos on making that happen, investment in R and D, we've seen how that pays off. We wouldn't, that's where the internet came from, right? Government R and D. But we're also doing something that in my career we've never done before, which is really a big move towards industrial policy. You know what the, what we're doing with semiconductors, what we're doing on batteries, what we're doing on, on solar, trying to recreate those industries in the United States. I guess my question for you is theoretically, I get the case for that, but that is not something we have much experience or skill at doing. We don't have the institutions to do it. We don't have a political system that can support it over the long term. I mean, we don't know what's going to happen in, in the next election. It could be an administration that's opposed to all those programs. So how can you give this group confidence that those things will work. So I believe, although throughout my career, it's not as though I've been a strong believer in industrial policy generally. I think if you look at the semiconductor industry and the way in which it's evolved globally over decades, what you see are enormous government interventions in virtually every country that plays a significant role and the United States has set back on its hands and allowed other countries to um through massive subsidies to um you know, really, really build their own capacity in semiconductors. And I think this is an issue where there are real national security concerns and there are technology spillovers and interactions that we're fooling ourselves. If we think that abandoning for all practical purposes, semiconductor manufacturing is a smart strategy for the United States. And how many areas like that are there? Mark Warner was on the stage earlier this morning and he was talking about a pretty big expansion from the ones I've already mentioned, he was talking about biotechnology mentioned several other categories. He thinks we have to get in this game in a big way. So you mentioned two and those are the two that I think we're focused on semiconductors in part because it's critical role, both national security and other technological developments that I think that's justified. And in the case of clean clean energy, um you know, partly I think we have developed a huge overdependence on China as a supplier in these areas and China has enormously subsidized its industry. We had a solar panel manufacturing industry in the United States that was essentially put out of business. Um You know, I maybe we'll talk about China. I'm not sure if that's where you want to go, but um I, I'm a believer that we should stay involved. Not, not just couple. Yes, I don't believe we should decouple at all from China. But I, I do think we have, we need to derisk in the sense that we have overdependence on China in areas that are critical to our national well being. And I think clean energy is among those. So um you know, this the subsidies, the tax subsidies in the Inflation reduction act, they provide huge incentives um both to do things in the United States to increase our own domestic capacity, by the way, creating really some good jobs, especially for people who've been losing out in this economy. People who don't have a college education, we've seen um $500 billion in uh manufacturing investments that have been announced because of these three, these three pieces of by people who are in this room today. So we II I wanna open this up. Uh I don't want, I have a lot of questions, but I don't want to monopolize your time if other people are out there who, who have questions here? We have one right here, please. Uh Riley mccormack. Um How concerned are you about the return of the bond vigilantes and the market dictating your borrowing rate versus the fed? Well, I, I mean, I take it that markets um de determine uh bond bond rates. Um The bond vigilantes I think I first came in um heard that term back in the early 19 nineties when inflation was high and uh interest rates were, were moving up in 94 and 95 and, um, nominal, you know, 10 year yields kept rising higher and higher. Suggesting that the Fed's work wasn't done and they weren't doing enough. And the concern was the bond bond markets were, uh, driving the Fed's behavior and that they would, uh, continue pushing the Fed, um, to the point where the economy would fall into a recession. I don't honestly think that that's the case. Now, I think the markets are trying to figure out what is, what is the fed and other central banks going to need to do to make sure that inflation stays low. I don't want to comment from my current perch on the details of monetary policy. But you know, I think, I think we'll see, some people have been surprised that the US economy has shown so much resilience. Consumer spending remains strong. Investment spending is solid housing is usually clopper by tight monetary policy and it has been, but it's stabilized and seems to be moving up. And so I think people are trying to figure out exactly what it's going to take to keep, keep inflation moving down. And the economic resilience that they see may suggest higher for longer, but we'll see and I think it's by no means a give and so last question and we can do this quickly. It's a yes or no kind of question. Uh uh Speaker mccarthy uh kept the shutdown from happening this weekend. He now stands to lose his position because of a group of renegades in his own party. Should the Democrats in the house, uh, help him keep his job? You know, I know it's a yes or no. I'm, I'm going to say neither, yes nor no. Um, uh, you know, it's for the Republicans and Democrats in the house to figure that out. Um, I'm pleased that they were able to keep the government up and running. Yes, we have a lot more to do. We have until mid November to pass appropriations bills or a continuing resolution. It's urgent that we, that Congress allocate funds for Ukraine that hasn't been done. That's really our focus exactly whether the speaker survives or who's, who's speaker and how that, how that happens. Uh I'm gonna leave it. Not the remit of the Secretary of the Treasury. No, it's not Janet Yellen. Thank you so much for being with. Bye.