Fiscal stimulus is no longer necessary to bring the U.S. to full employment, Federal Reserve Chairwoman Janet Yellen said Wednesday, marking a significant departure from the advice she has given to Congress in recent years.
“I would say, at this point, that fiscal policy is not obviously needed to provide stimulus to get us back to full employment,” Yellen said at a press conference following the Fed’s decision to raise interest rates for the first time in a year.
Previously, both Yellen and her predecessor Ben Bernanke counseled Congress that greater fiscal stimulus, meaning spending or tax cuts, could boost the economy in the short run.
That advice is changing as unemployment falls to rates that the Fed believes could eventually drive up unemployment, she said.
“With a 4.6 unemployment [rate] and a solid labor market, there may be some additional slack in labor markets, but I would judge that the degree of slack has diminished,” Yellen said.
The Fed chairwoman had been asked how much fiscal stimulus the economy could bear before it began to “overheat,” or suffer too-high inflation.
That topic was brought up several times at Wednesday’s press conference because of the possibility that President-elect Trump might implement an agenda that includes sizable tax cuts and infrastructure spending, both of which would be counted as fiscal stimulus. In recent weeks, investors have reckoned that fiscal stimulus from Congress could prompt the Fed to raise rates earlier than planned.
Yellen avoided giving Trump or Congress advice, but did note that the high level of the federal debt is another consideration in deciding whether to increase spending or cut taxes.
