By David Lawder
NEW YORK (Reuters) -U.S. Treasury Secretary Janet Yellen told Reuters that a "soft-landing" scenario for the U.S. economy can withstand near-term risks including a United Auto Workers strike, a government shutdown threat, a resumption of student loan payments and spillovers from China's economic woes.
Yellen said on Monday that she sees evidence that the economy is keeping to a path of making substantial progress to reduce inflation while maintaining a strong labor market and healthy consumer spending.
"What I'm seeing in the economy is a cooling in the labor market that's taking place in a healthy way, that does not involve mass layoffs," Yellen said during a discussion with Reuters editors, reporters and columnists on Monday. "It's some of the heat coming out of the job market."
The Federal Reserve on Tuesday starts a two-day meeting to weigh its options in its aggressive campaign of rate hikes to contain inflation as economists say the auto strike, the potential for a government shutdown and the Oct. 1 end of a three-year moratorium on student loan repayments all could conspire to cool the economy more quickly than expected.
Yellen acknowledged that the soft-landing outlook, which has gained traction among economists in recent weeks as recession predictions fade, may be buffeted by headwinds such as the UAW strike against Detroit automakers.
The union has threatened to widen the strike, already idling some 13,000 workers, to more plants if no progress was made towards a deal by Friday.
President Joe Biden's administration is working to encourage both sides to resolve the strike quickly, Yellen said.
"The President is monitoring it closely, has sent people to Detroit to be ready to assist, and is really urging the automakers to actively negotiate 24/7 with the unions to get a fair deal," Yellen said.
She added that since the government has poured in resources including tax breaks to ensure a strong future for electric vehicles in the United States, it was important to Biden that "the jobs that are created in that industry are good jobs."
'UNNECESSARY RISK'
The risk of a federal government shutdown in less than two weeks has grown as hardline Republicans in the House of Representatives demand spending cuts beyond levels agreed in June. House Speaker Kevin McCarthy faces a major test of his position in trying to pass spending legislation before the Sept. 30 end of the fiscal year.
"It’s an unnecessary risk to the economy and to the normal functioning of government," Yellen said, adding there was bipartisan support in the U.S. Senate for adhering to the $1.59 billion fiscal 2024 discretionary spending limit agreed in June.
Nonetheless, this and other risks were not expected to knock the economy from its current path of slower but sustainable growth, she said.
The U.S. Treasury market "continues to function pretty well" despite higher rates and some volatility, she said.
"There have been periods in which liquidity has been a bit more strained. But nothing that is really out of line with what you would expect given the volatility in the underlying market," Yellen added.
The student loan repayment resumption on Oct. 1 will siphon away some spending, but Biden's enhancements to income-driven repayment policies will provide relief to many borrowers, Yellen said.
CHINA "DE-RISKING"
China's economy is struggling with a slow pandemic recovery, falling home prices, high indebtedness and slowing productivity that present challenges to policymakers in Beijing, but China has policy space to address them, Yellen said.
"There could be some spillovers to the United States, but I believe they're relatively small, it's countries in Asia that are likely to be more affected," Yellen told MSNBC's "Morning Joe."
Yellen repeated to Reuters that the United States was not seeking to decouple from the Chinese economy and said she welcomed continued trade and investment in "uncontroversial" sectors, but the Biden administration would work on "de-risking" supply chains that have an "undue overdependence" on China.
She said she has made clear to Chinese counterparts that narrow U.S. restrictions on technology and outbound investments are aimed at protecting U.S. national security, not to impair China's modernization.
"I think it's worthwhile to have their input" on these policies, she said, referring to a U.S.-China dialogue for exchanging information on U.S. export controls launched during Commerce Secretary Gina Raimondo's recent trip to China.
"They're entitled to that, but it's not like a compromise. We are going to do what we need to do."