WASHINGTON, April 15 (Reuters) – US Treasury Secretary Janet Yellen said banks are likely to become more cautious and further restrict lending following recent bank failures, potentially negating the need for further Federal Reserve rate hikes.
Yellen, in an interview with Fareed Zakaria GPS, said that policies aimed at containing the systemic threat created by the collapses of Silicon Valley Bank and Signature Bank last month had stabilized deposit outflows, “and the Things have remained calm,” a transcript released by CNN on Saturday.
“The banks are likely to become a little more cautious in this environment,” Yellen said in an interview that will be broadcast on Sunday. “We were already seeing some tightening of lending standards in the banking system prior to this episode, and more may follow.”
She said this would lead to a credit squeeze in the economy that “could be a substitute for any further rate hikes the Fed needs to make.”
But Yellen said she doesn’t yet see anything in this area that is “dramatic enough or significant enough” to change her economic outlook.
“So I think the outlook is still moderate growth and (a) a continued strong labor market with inflation falling,” she said.
Yellen is far from the only Treasury official who expects some tightening of bank lending as a result of last month’s financial sector turmoil. Some Fed officials said the Federal Reserve should tread more cautiously as they expect banks to tighten lending in the coming months.
Weekly bank balance sheet data released by the Fed does not yet show any significant deterioration in bank lending while showing that deposit outflows have stabilized over the past two weeks after an initial spate of withdrawals around the time of the SVB and Signature mid-failures had -march.
Yellen was asked whether it would be advisable to develop a central bank digital currency that would allow US consumers to have accounts directly with the Fed amid concerns about the safety of deposits.
“There are important pros and cons to such a decision, so it needs serious analysis, but it could be something in the future of Americans,” Yellen said.
DOLLAR DOMINANCE
Yellen also told CNN that US-led sanctions and export controls on Russia deprived it of material for its war in Ukraine, and that the $60-a-barrel price cap imposed by Western countries on Russian oil turned Moscow’s expected budget surpluses into deficits.
The sanctions and export controls have forced Russia to turn to Iran and North Korea for military equipment and supplies, and the US has taken steps to curb sanctions circumvention, Yellen said.
“But we think his (President Vladimir Putin’s) military really doesn’t have the equipment it needs to wage war,” she added.
Asked whether sanctions could undermine the dollar’s role as the world’s reserve currency, Yellen acknowledged possible risks.
“So if we apply financial sanctions linked to the role of the dollar, there is a risk that over time, as you have said, it could undermine the dollar’s dominance. But this is an extremely important tool that we are trying to use wisely,” Yellen said, adding that sanctions are most effective when used with the support of allies.
The sanctions are making China, Russia and Iran want to find an alternative to the dollar, but this is “not easy” to achieve as it is backed by the world’s safest and most liquid assets – US Treasuries.
“Dollars are common. We have very deep capital markets and rule of law, which are essential in a currency used for transactions around the world,” Yellen said. “And we haven’t seen any other country that has the basic infrastructure — institutional infrastructure — that would allow its currency to serve the world like this.”
Reporting by David Lawder and Daniel Burns; Editing by Andrea Ricci
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