By Andrea Shalal and David Lawder
WASHINGTON (Reuters) -The Biden administration's spending on stimulus to keep the economy going during the COVID pandemic may have contributed "a little bit" to inflation, U.S. Treasury Secretary Janet Yellen said in an interview on CNBC on Wednesday.
Yellen said supply chain issues and shortages were the main factor driving up prices during the pandemic, but conceded that stimulus spending could have played a role as well.
"It may have contributed a little bit to the inflation, but by and large, inflation was a supply-side phenomenon," Yellen said, in a rare concession by Biden administration officials about the role their policies played in driving up prices.
The Biden administration and Democrats in Congress enacted the $1.9 trillion American Rescue Plan Act in March 2021, after more than $3 trillion in COVID relief spending approved during President-elect Donald Trump's first administration in 2020.
These actions kept paychecks flowing for idled workers, paid rent and put thousands of dollars directly into Americans' bank accounts, fueling sharp increases in consumer spending at a time when the economy was plagued by pandemic-driven shortages.
Yellen, who leaves office later this month, said she remains convinced the Biden administration's COVID spending had been needed to prevent economic scarring, as had been seen after previous downturns. Economic scarring happens when business closures and layoffs result in people suffering long periods of unemployment that leave them alienated from the workforce.
Price increases were largely due to shortages of goods coming from China and other countries that had also shut down, which left automakers and others with insufficient semiconductors and other components to produce goods.
Yellen said there had not been much progress in lowering prices in recent months, but she remained convinced that U.S. inflation was on a "downward path."
She said the labor market had cooled but was in a good state, and recent U.S. economic data suggested that interest rates could remain higher than people had expected.
RATES HIGHER
But she said there was also increased uncertainty about the future of economic policies as Trump prepares to take office on Jan. 20. This was helping to increase yields on longer-term Treasury debt, along with market anticipation of higher interest rates for longer, she said.
Despite higher rates, she said the U.S. economy was doing very well, with solid consumer spending and investment.
But with higher debt servicing costs, it was imperative to put fiscal policy on a sustainable course. She added that moves by Republicans to defund the modernization of the Internal Revenue Service could result in an $800 billion increase in the federal deficit over a decade.
Extending Trump's expiring personal income and small business tax cuts without offsets would boost deficits by another $5 trillion over 10 years.
"So my hope is that this will be done in a responsible way, maybe focusing on middle class tax cuts and looking for additional revenue raisers," she said.
Asked about Trump's non-governmental Department of Government Efficiency, which co-chair Elon Musk has said wants to find $2 trillion in annual budgetary savings, Yellen said it was "hard to see how the math on that works" with little room in discretionary programs for cuts. There also was little political appetite among both Republicans and Democrats to reduce Social Security and Medicare spending, she added.