Treasury Secretary Janet Yellen has cautioned privately against overreacting to anecdotes of worker shortages, arguing that more data and time are needed before assuming they reflect a genuine problem in the American economy, according to the two people, who spoke on the condition of anonymity to discuss the sensitive matter.
The discussions reflect how senior White House officials are grappling with the new challenges facing the U.S. economy as it tries to recover from the pandemic. Biden officials are caught in the awkward position of maintaining that inflation and worker shortages do not represent major current problems, while also recognizing they pose a potential threat.
Yellen has received briefings and memos on claims about worker shortages from administration economists. Biden administration officials have reviewed statistics such as applications per job, the number of unemployed workers per job opening, and online job postings, people familiar with the matter said. Typically, tight labor markets would correspond with wage growth at the bottom end of the income distribution as firms compete for workers. But economists and administration officials have yet to see that jump, suggesting that a shortage is not a major problem.
“We are poring over the data as well as the anecdotes to evaluate this,” Jared Bernstein, a member of the White House Council of Economic Advisers, said in an interview. “We certainly don’t see a level of wage pressures that would be consistent with a very deep supply constraint. But, that said, we expect there to be some wage pressure as the labor market tightens up — that’s an important attribute of a tighter job market.”
White House officials are carefully monitoring inflationary risks amid a flurry of concerns on Wall Street, particularly as news reports point to rising prices across sectors. Deese has shown a keen interest in how White House officials are talking about inflation, worried about sending any signals that the administration is overly concerned. The White House has sent talking points to administration officials to stress that any signs of inflation are “transitory” as part of the rapid economic recovery from the pandemic, mirroring their public position on the matter.
To some, Yellen appeared to break with those talking points on Tuesday, suggesting Biden’s spending proposals could lead to an overheating of the economy down the road that might require the central bank to raise interest rates. The view reflected the realities of monetary policy — the Federal Reserve would raise rates if inflation spiked — but led to a brief panic in the stock market because it seemed to raise the possibility that the administration believes the recovery may need to be slowed down. A Treasury official said Yellen’s remarks had been taken out of context.
“It may be that interest rates will have to rise somewhat to make sure our economy does not overheat, even though the additional spending is relatively small relative to the size of the economy,” Yellen said at an event hosted by The Atlantic.
Yellen clarified the matter later Tuesday, telling the Wall Street Journal: “I don’t think there’s going to be an inflationary problem.”
Critics such as former Democratic treasury secretary Larry Summers argue that the administration is wrong to downplay inflationary increases as transient. Summers warned in March that the latest stimulus package would overheat the economy, leading to a public disagreement with many of his former colleagues inside the administration.
“The data flow has tended to bear out inflation fears. Relative to a couple of months ago, there is much clearer evidence of labor shortage, there are more and more pervasive supply bottlenecks, commodities and future commodities prices are rising,” Summers said in an interview Tuesday. “Housing is on fire, and market inflation expectations are trending upwards. None of these are inherently transitory factors, so to my mind, grounds for concern are increasing.”
The first-quarter report on economic growth, released by the Bureau of Economic Analysis last week, said that prices grew at a 3.5 percent annualized rate in the first quarter and are up 1.7 percent from a year earlier. For now, inflation has primarily spiked only in specific sectors, such as the housing and lumber markets, as suppliers struggle to catch up with a surge in consumer demand. The most commonly measured metric for aggregate inflation has remained in check, at least up to this point, and slowing economic growth prematurely could backfire on the administration.
“When you don’t see wages growing … you can be fairly certain that labor shortages, though possibly happening in some places, are not a driving feature of the labor market. And right now, wages are not growing at a rapid pace,” said Heidi Shierholz, senior economist and director of policy at the Economic Policy Institute, a left-leaning think tank. Shierholz said on Twitter that there are 80 percent more unemployed workers than job openings in the leisure and hospitality sector.
The Federal Reserve has for months dismissed fears of out-of-control inflation. Fed Chair Jerome H. Powell consistently sends the message that as the economy reopens, price bumps will be temporary and won’t pulse through the entire economy.
Inflation may tick up in the near-term, he says, as supply chain bottlenecks force businesses to raise prices. But Powell is urging patience so that the labor market — which is down at least 8 million jobs from February 2020 — has time to heal.
“If we see inflation moving materially above 2 percent in a persistent way … then we will use our tools to guide inflation and expectations back down,” Powell said last week. “This is not what we expect, but no one should doubt that in the event, we would be prepared to use our tools.”
Congressional Republicans and some economists have heavily criticized the $300-per-week supplemental unemployment benefit that Democrats’ stimulus package extended through September, saying it discourages people from working. Several GOP lawmakers have begun posting on social media accounts about fast-food chains that had to temporarily close while citing their inability to hire enough workers. Reports that restaurants cannot find adequate staffing have emerged throughout the country. The construction industry has said it faces a shortage of 200,000 workers. Trucking industry groups say they also face major shortages.
Many economists say worker fears about the pandemic, the lack of available child care, or other short-term factors may be just as responsible for the struggles some firms are facing. John Lettieri, president and CEO of the Economic Innovation Group, said it is too soon to say whether the unemployment benefits will affect the recovery.
“Expanded unemployment benefits have not been a problem up until this point but could become an issue as the number of job openings catches up with the number of unemployed workers and demand surges,” Lettieri said. “There’s a lot we don’t know. But it’s something to take seriously.”
The White House and Federal Reserve also run major risks if they prove too reactive to complaints about economic overheating. Big firms complained loudly about worker shortages as the economy came out of the Great Recession, but the labor market expanded over the next decade until the pandemic, as millions of Americans came back into the workforce through expansionary fiscal and monetary policies.
As chair of the Federal Reserve, Yellen raised interest rates amid concerns that inflation could rise rapidly. She later said she may have “misjudged the strength of the labor market,” and many economists now say prematurely responding to inflation led to weaker wage growth than necessary for millions. Those tepid economic conditions may have also cost Democrats at the ballot box.
“These concerns are overblown. The signs are, unemployment still remains high, particularly among Black people, and wages still remain flat,” said Darrick Hamilton, an economist at the New School.
Rachel Siegel contributed to this report.