'The American economy is fundamentally strong': Janet Yellen disagrees with Moody's 'negative' US outlook — says Treasuries are still the world's main 'safe and liquid' asset. Who's right?

“This is a decision that I disagree with,” she said at a press conference following the APEC Finance Ministers’ Meeting in San Francisco. “The American economy is fundamentally strong, and Treasury securities remain the world’s preeminent safe and liquid asset.”

The U.S. Federal Reserve has implemented significant interest rate hikes since March 2022. While higher rates can cool inflation, Moody’s recent outlook revision highlights concerns about their impact on the country’s fiscal deficits.

“In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody's expects that the US' fiscal deficits will remain very large, significantly weakening debt affordability,” the ratings agency said.

It also warned that “continued political polarization” in Congress may heighten the risk of lawmakers failing to achieve consensus on a fiscal plan to “slow the decline in debt affordability.”

The national budget deficit for fiscal year 2023 was $1.7 trillion, up from $1.38 trillion in 2022.

In contrast to Moody’s assessment, Yellen emphasized various strong aspects of the U.S. economy.

Is the US economy fundamentally strong?

Yellen pointed out that over the past few years, the U.S. economy has made a historically fast recovery from a deep recession.

“Our unemployment rate is near historic lows, inflation has come down significantly and our economy grew by almost 5% in the third quarter,” she said.

According to the Labor Department’s latest jobs report, nonfarm payrolls increased by 150,000 in October 2023. The unemployment rate rose from 3.8% to 3.9% for the month. Historically, the long-term average unemployment rate in the U.S. typically hovers around 5% to 6%.

Looking at inflation, the U.S. consumer price index saw an annual increase of 3.2% in October. Although the figure remains above the Fed’s long-run inflation target of 2%, it’s down quite a bit from the peak 9.1% increase registered in June 2022.

Yellen’s view on GDP growth is also noteworthy.

Last month, the Commerce Department reported that for Q3, real GDP in the U.S. increased at an annual rate of 4.9%. This statistic not only exceeded economists’ expectations, but also marked the biggest increase since Q4 of 2021.

That said, Yellen acknowledged the potential difficulties posed by prolonged high interest rates, stating, “It is true that higher interest rates, if they last, do create a challenge, an additional challenge to debt sustainability.”