By David Lawder and Kanishka Singh
NEW YORK/WASHINGTON (Reuters) -Treasury Secretary Janet Yellen said on Tuesday U.S. growth needed to slow to a pace more in line with its potential rate to bring inflation back to target levels since the economy was operating at full employment.
But demand-supply imbalances in the labor market have abated, she said, which was a healthy sign for the economy.
"Growth has to slow. I mean, you want growth to slow, you want it to be in line with potential when you're operating at full employment," Yellen told reporters on Tuesday after a climate finance event in New York during the U.N. General Assembly week.
"It's completely natural and desirable, that growth -- the pace of growth -- is slowing."
U.S. gross domestic product is still expanding at a pace well above what Federal Reserve officials regard as the non-inflationary growth rate of around 1.8%, often referred to as the "potential" growth rate.
U.S. GDP expanded at a 2.4% annualized rate in the second quarter, and some estimates put the current quarter's pace at more than twice that. The robust U.S. economy has defied an aggressive campaign of Fed rate hikes over the past 18 months, creating a conundrum for policy makers.
Yellen did not specify what she regards as the U.S. economy's potential growth rate, except to say that it has been growing above potential since it raced out of the COVID-19 pandemic in 2021.
Federal Reserve officials on Wednesday are due to reveal a policy decision widely expected to keep rates on hold for now, but also flagging in new economic projections whether they feel rates still need to rise further before the end of the year to bring inflation back to their 2% annual target.
Yellen said that pressure was coming out of the labor market, with demand for labor softening, which was helping to bring down core inflation. Surveys of companies showed that difficulty in hiring workers had abated, job opening are down and the "quit rate" of workers leaving for higher paying positions was lower - all healthy signs for the labor market.
Yellen said she saw a lower risk that a recent rise in oil and gasoline prices would trigger a rise in inflationary expectation, because core inflation was lower
"The Fed has been focused on that, we're in a somewhat safer environment with low inflation," Yellen said.
CHINA SPILLOVERS
On China, Yellen said she expected Chinese authorities to use their fiscal and monetary policy space to avoid a major slowdown of its economy, and this would help limit spillovers to the U.S. economy.
"There could be spillovers. I wouldn't rule it out," Yellen said.
China, the world's second-largest economy, has lost steam since the second quarter and showed only tentative signs of stabilization last month with policy support. It has sought to court foreign capital as its economic recovery from the COVID-19 pandemic slows in the face of tepid overseas demand and property weakness.
"I think the Chinese would most likely use the policy space they have to try to avoid a slowdown with major proportions," she added.