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Thursday, February 25, 2021

Fed Chair Janet Yellen: Consider the Implications of Changes to Trade Policy

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Predicting an uncertain global economy, Federal Reserve Chair Janet Yellen had the same advice for President Trump she gave to the president-elect: “Go slow” and look for opportunities to “broaden the support from domestic sources of revenue” — with a view to reaching “a balanced approach” in the coming years.

At a press conference Thursday afternoon after the Fed had released its first estimate of growth in fourth-quarter gross domestic product, she noted the “growing caution” around some of the central bank’s more dovish policies, from her seat in the room.

Here are some of Ms. Yellen’s thoughts on those issues.

On Trump’s calls for renegotiating trade deals and renegotiating the North American Free Trade Agreement in the U.S.:

The priority is to maintain trade in a fair way with no winners and losers. If tariffs or other barriers are imposed, their real negative effect would be to make American workers less productive.

On the subject of infrastructure spending:

It is important to consider the extent to which infrastructure spending could indeed be the effective multipliers that many of our nation’s transportation planners project. It is also important to take account of the possibilities that can raise the funds to pay for infrastructure, such as working with states and local governments, exploring taxes and the like.

On taxes:

The post-crisis low capital gains tax environment has not only brought capital back into the United States, it has resulted in a net increase in household wealth. It should not be hard to retain our competitive advantage in the economy when one government can propose and implement a tax rate that is lower than the European Union. It should also be clear that different parts of the U.S. economy benefit from different sets of tax laws. This would be particularly true if a capital gains tax rate were reduced. The law that currently exists in its current form, with the individual tax rates, breaks down fairly heavily in favor of the small businessman and entrepreneur. While the Dodd-Frank Act imposes a tax on investment income, such as dividends, there are loopholes that help compensate for this.

On risks to the economy:

We know that economic uncertainty is rising in a number of emerging economies. To the extent that more businesses are willing to talk about risks and their potential impact on their industries, this reflects this uncertainty.

On the future direction of interest rates:

There are downside risks to the economic outlook. Inflation has eased below the Fed’s 2 percent target. That said, inflation will likely rise over time as the labor market improves. Moreover, our policy rates remain near record lows. Given the balance of information about the economy and the risks around the economic outlook, the trajectory of our policy will likely depend more on whether economic risks show up and the potential for “force multipliers” than it will on our policy rate.

She added, “What the Fed does with monetary policy changes depends on all the other factors that I mentioned.”

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