The Daily Update: Yellen's Inflation Doubts

Janet Yellen, the Treasury Secretary, has dismissed fears that Biden’s USD1.9tn pandemic-relief bill will lead to inflation, in doing so casting doubt on the reflation trade that has spooked bond markets since the turn of the year. She stated that prior to the current crisis the unemployment rate in the US was about 3.5% and that there was ‘no sign of inflation increasing’. Yellen stated that before the pandemic inflation was already ‘was too low rather than too high’ and even if there were signs of inflation they had the tools ‘to deal with that’.

Yellen also spoke about the shape of any recovery, believing that a K-shaped recovery trajectory, the divide between the haves and have-nots is what she is seeing. ‘We have a K-shaped recovery going on, in which high-income people are doing much better than those at the bottom of the economic ladder -- low-wage workers and minorities.’ This was a problem before the coronavirus; however, the pandemic has exacerbated it. A glaring example was the fact that Black unemployment rate climbed to 9.9% last month even as the overall rate fell to 6.2%.

The K-shaped recovery is something we have written about several times over the last few months. As we noted back in September last year, the major implication would be that both monetary policy accommodation and fiscal policy assistance will continue for longer due to central banks and governments having to support the ‘have-nots’ for longer whilst knowing such schemes are benefitting those ‘haves’ at the top of the pile. As the Washington Post stated, a K-shaped recovery will see ‘those at the top of the heap strengthen their positions while the rest see their fortunes further degrade’.