Janet Yellen argues strong labor market protects U.S. from recession

In May, Janet Yellen, the Treasury Secretary, admitted that she was wrong about the path of inflation. Despite that, she said that the central bank's policies would be "successful."

During an interview on NBC's "Meet the Press," Yellen said that the Fed is focused on bringing down inflation. She also noted that she expected the central bank's policies to be successful.

In early June last year, the Treasury Secretary noted that inflation would likely continue to rise. She also said that it could reach around 3 percent. However, she noted that these factors are transitory and do not threaten the economy.

"We have in recent months seen some inflation, and we — at least on a year-over-year basis — will continue, I believe through the rest of the year, to see higher inflation rates, maybe around 3 percent," Yellen said about in inflation in June 2021. "But I personally believe that this represents transitory factors."

In June 2021, the U.S. economy continued to create jobs at a robust rate, with 372,000 new positions added. The unemployment rate remained at 3.6%. It was also the fourth straight month of gains above 300,000.

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"The labor market is now extremely strong," said Yellen on last year's data. "This is not an economy that's in recession, but we're in a period of transition in which growth is slowing. And that's necessary and appropriate, and we need to be growing at a steady and sustainable pace. So there is a slowdown, and businesses can see that and that's appropriate, given that people now have jobs, and we have a strong labor market."

Despite the various indicators released, Yellen noted that the economy is not yet in a recession. She said that the country was only experiencing a slowdown.

Labor market holds key to recession

Despite the steady job growth, last week's data showed that the labor market started to weaken. The number of people filing for unemployment benefits reached its highest level in eight months. Inflation is still expected to remain high. However, the recent rate hikes by the Federal Reserve are helping to bring inflation back to check.

The Biden administration's decision to sell some of its oil from the Strategic Petroleum Reserve has also helped lower gas prices.

According to Yellen, gas prices have recently decreased by about 50 cents a gallon.

To avoid a recession, the Fed should be able to bring down inflation without triggering a widespread economic decline, said the former Fed chief. Yellen also noted that the labor market should continue to strengthen.

The U.S. economy contracted at an annual rate of 1.6 percent in the first quarter. Economists expect the country's gross domestic product to grow slower rate of 0.4 percent in the second quarter.

If slow growth remained in the second quarter, Yellen noted that it would not signal that the economy was in a recession. She ensured that the labor market was still strong and that the strong demand still contributed to the country's growth.

NBC anchor Chuck Todd pushed back against the former Fed chief for her interpretation of the definition of a recession. He argued that if the economy contracted in two quarters, it would be a recession.

Despite the technical definition of a recession, Yellen said it is not a technical term. The National Bureau of Economic Research uses a broad range of indicators to determine if the country is in a recession. She said that even if the economy contracted in two quarters, it would not be considered a recession because of the strong labor market.