The Biden administration announced a series of new efforts to boost housing affordability, including $100 million to help finance affordable housing through the Community Development Financial Institutions Fund and calling on Federal Home Loan Banks to do more to boost their support of housing programs.
US Treasury Secretary Janey Yellen detailed the efforts in a speech in Minneapolis, Minnesota. In an exclusive interview with Yahoo Finance's Jennifer Schonberger, Yellen says the initiatives are not a "silver bullet" for housing affordability but that the administration wants to use "every tool that we have" to lower the cost of buying a home.
Housing costs have been a big factor in propping up inflation. Yellen expects inflation to come down, saying, "As we get into next year, I believe that inflation will go back to the Fed's 2% target." One thing she pointed to was the lag in rental prices, noting that many declines would only be seen when renters renew their leases, meaning that it could take longer for rent decreases to appear in the inflation data.
Yellen, a former Federal Reserve chair, declined to comment on when she thinks the Federal Reserve will cut interest rates. She did say, however, that the economy is strong and that though growth may be slowing, she doesn't "see the basis, really, for a recession in the outlook."
On the deficit, Yellen thinks that a debt crisis in the United States can be avoided as long as there is deficit reduction. She does bring up the expiration of the Tax Cuts and Jobs Act of 2017, saying that President Biden wants to preserve the tax cuts for those making under $400,000 but that "he would raise funds in order to find ways to cover that so that it doesn't just bust the deficit."
Yellen demurred on commenting on the policies of a potential Trump administration, but did say the Tax Cuts and Jobs Act promised investments she claims never came and that "it gave huge tax breaks to corporations and to wealthy individuals, and it resulted in an enormous increase in the deficit and lowered tax revenues below historic norms."
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This post was written by Stephanie Mikulich.
Video Transcript
Yahoo Finance’s Jennifer Schonberger: Secretary Yellen, thank you so much for sitting down with me. It is great to have you on the program.
US Secretary of the Treasury Janet Yellen: Thanks for the invitation.
Schonberger: Housing affordability has become a major issue for Americans in this country. You're here today in Minneapolis announcing new initiatives on housing affordability, including a brand new Treasury program that would allocate $100 million over three years to help finance housing affordability. How quickly can Americans expect relief from these programs?
Secretary Yellen: Well, these are things that are in our power now with the tools we have that I think will be helpful.
But I don't want to say that there's a silver bullet. I think we look to Congress to do much more. President Biden has proposed a program that would lead to the construction of 2 million new housing units, which would really make a sizable dent in the problem that we face.
But we want to use every tool that we have. And today we announced, as you said, $100 million from returns on investments that we've been making in community development financial institutions over the next three years. And that can make a noticeable difference.
We're also calling on the federal home loan banks, which were chartered to deal with housing and promote affordable housing, to up their contributions, their use of their income to 20 percent of their income to help with the affordable housing situation. We made a few additional announcements today, things we can do to lower burden in one of our key housing programs, the Magnet Fund, and also to help housing agencies, local housing agencies, have access to reasonable, low-cost financing through the federal financing bank.
Schonberger: It's not just low-income Americans, though, that are grappling with housing affordability.
It's the middle class. So why not offer tax incentives to try to increase housing supply on the market, whether for home builders or investors who bought up so many of the foreclosures following the financial crisis?
Secretary Yellen: Well, we agree with that. The most important tax incentive that we have, it's the most important affordable housing program, is the low-income housing tax credit.
And there is a bipartisan bill that passed the House that we're supportive of. We'd love to see the Senate vote on it that would increase the supply of these housing tax credits and boost affordable housing. So President Biden has also proposed a tax rebate for first-time homebuyers and, interestingly, also for sellers of homes, many of whom have seen such a big increase in mortgage rates.
They took out their own mortgages when rates were much lower. They have a reason to move, but having to buy a new house at current mortgage rates would really boost their housing costs. They're reluctant to move, and not much housing goes on the market these days.
And this would be a credit also that goes to sellers that would help unlock the housing market.
Schonberger: Secretary Yellen, have you been to the grocery store lately?
Secretary Yellen: I sure have. I go every week.
Schonberger: It's sticker shock, isn't it? When you look at shipping costs, those have come down. Global food commodity prices have also come down, but food prices still remain high. I know they're not rising at the rate that they were last year, but they're still up 20 percent from pre-COVID.
So should the U.S. invest in agriculture to boost the food supply in this country?
Secretary Yellen: Well, I think largely it reflects cost increases, including labor cost increases that grocery firms have experienced, although there may be some increases in margins. Earlier today, I met with a group of CEOs, including the CEO of Target, and they explained and they've announced that they understand that households are struggling with costs, including food costs, and they have undertaken cuts in the price of bread, milk, diapers, other core purchases that are necessities for households. And I think that's to be applauded.
I think that kind of thing is helpful. But I would be reluctant to agree that we should be involved in subsidizing agriculture.
Schonberger: So investing in agriculture.
I want to ask you about your overall outlook for inflation. It looked like it was stalling in the first quarter. We've gotten some better readings here in the second quarter, namely that cooler May CPI reading.
We've got another inflation reading coming on Friday. Do you expect inflation will fall at a faster rate as we go through the summer months and the rest of the year, or is it going to continue to be sort of a slower slog?
Secretary Yellen: Well, I do expect inflation to come down. And as we get into next year, I believe that inflation will go back to the Fed's 2 percent target.
But there's month-to-month variation. And one of the pieces that has been keeping inflation above the Fed's target is housing costs. The rental prices for new apartments have stabilized and in many parts of the country come down.
But people who have existing contracts really only see changes in their rental prices when their contracts renew. And there has been a considerable run up since before the pandemic. So it takes a while before people who have existing rental contracts see current costs fully priced in.
And that's been holding housing cost increases above normal levels. I feel pretty confident that that is something that will come down over the next year and keep moving inflation down. And labor markets, while very strong nationally, are a little bit less tight than they were right in the aftermath of the pandemic.
Schonberger: So given your outlook for inflation, you say you do expect we'll hit 2 percent by next year. And the fact that Americans are grappling with high home costs, part of that is mortgage rates near 40-year highs. When do you think Americans could see interest rates come down?
Secretary Yellen: Well, I'm not going to speculate on what the Fed is going to deem appropriate.
They set interest rates in order to make sure inflation comes down, but also to keep the economy operating near full employment and their projections suggest that most members of the committee envision that there will be some interest rate cuts later this year or next year, but it really depends on how the data unfolds with respect to the economy.
Schonberger: If rates are held at current levels through December, do we risk sowing the seeds of a recession?
Secretary Yellen: Well, that's something that the Fed will be looking at. As I said, the Fed wants inflation to come down and they've made clear that when they gain confidence that we're on a stable downward trend, that they think it will be appropriate to cut rates.
They certainly don't want to cause a recession when it's unnecessary. And that's the balancing act.
Schonberger: And you don't think a recession is in sight right now?
Secretary Yellen: I think we've got a good, strong economy.
We grew very rapidly after the pandemic. Unemployment was very high. Rapid growth was needed and appropriate to get people back to work.
Once you have an economy with an unemployment rate that's 4% or below, which is what we've had for well over a year or two years, I mean, this is a 50-year record in terms of the strength of the labor market. You expect somewhat slower growth in the economy. But households, consumer spending remains healthy.
Investment's been strong. I don't see the basis really for a recession in the outlook.
Schonberger : I want to ask you about the Congressional Budget Office's latest estimate for the deficit.
They now say it's going to rise by $400 billion more than thought to nearly $2 trillion this year. Given the CBO's latest estimate and the amount of treasuries that are needed to fund the deficit, how much longer can the Treasury maintain the strategy of financing using shorter-term bills without changing the long end? Is it a bit lopsided?
Secretary Yellen: Well, so it isn't the Treasury's strategy to finance increases in the deficit or in debt issuance by using just short-term bills. Long-term issuance is increased.
And if deficit projections continue to increase, issuance at the long end will go up as well. But the Treasury follows an approach it has for many years of making issuance of longer-term debt regular and predictable. And so it's not something that we want to suddenly change in a dramatic way.
So if there's a shock to the economy, for example, when COVID hit, CARES Act and later the AARP were passed, big increases in expenditure needed as a buffer, what happens is the short-term debt, the market can absorb a lot of that and that's issued and then that debt is termed out over time.
And that's what we would do. But it's not a policy to just finance by issuing at the short end.
Schonberger: Speaking of the CBO, they're projecting that debt will reach 122% of GDP by 2034.
Are we headed for a debt crisis?
Secretary Yellen: That's if we don't have deficit reduction. But President Biden has already signed bills resulting in a trillion dollars of deficit reduction and his 2025 budget proposes an additional $3 trillion of deficit reduction over the next 10 years.
That's sufficient if you look at the budget projections to hold the debt-to-GDP ratio at more or less its current level, which is about 100%, would prevent that big increase that you just mentioned. So fiscal sustainability is important. I think we need to get deficits down to stabilize the debt-to-GDP ratio.
I think the most important metric in judging sustainability is the interest cost of the debt. And the interest cost of the debt, even with higher interest rates, is at normal historical levels. It's something that if it stays here, if we engage in deficit reduction so that it stays at this level, I think we'll be on a fiscally sustainable course.
So next year, we're going to see the expiration of many of the tax cuts that were built in to the Tax Cut and Jobs Act of 2017. And we have to make sure that we address that expiration in a fiscally sustainable and responsible way. President Biden wants to protect those earning under $400,000, let them keep the cuts, but he would raise funds in order to find ways to cover that so that it doesn't just bust the deficit.
Schonberger: To your point, Secretary Yellen, what impact would Donald Trump have on our economy if he's elected?
Secretary Yellen: Well, look, I'm governed by the Hatch Act, and I can't get into electoral politics. I guess I could just make a couple of policy-oriented comments, which is that the signature policy from the Trump years was the Tax Cut and Jobs Act. And it promised an investment boom, which really did not materialize.
It gave huge tax breaks to corporations and to wealthy individuals. And it resulted in an enormous increase in the deficit and lowered tax revenues below historic norms. And I think it's responsible for many of the problems that we face now with our fiscal trajectory.
And so that would concern me to leave all of that in place.
Schonberger: I want to ask you about tariffs. The administration levied new tariffs on $18 billion of Chinese imports back in May.
Does the administration think that tariffs could be a bigger tool in the toolbox when it comes to economic policy?
Secretary Yellen: So we're trying to use them in a very targeted way. We've made a conscious decision, not only the administration, but also Congress, that there are industries that are strategic, that we think it's important to have a good base of activity in the United States. And I'm thinking particularly of semiconductors and also clean energy related items, whether it's electric vehicles, batteries, solar panels, wind turbines.
At the moment, we're heavily, heavily dependent on China for most of these things. And China is following a strategy in which they are heavily subsidizing their industry to build capacity. And they've invested to the point of massive overcapacity.
So China, for example, has enough capacity to produce solar panels that it will exceed entire global demand. We have incentives for domestic producers to engage in this activity in the United States. It's something we think is important for job creation and for our security, supply chain resilience.
And so we want to protect this aspect of our industry from what really amounts to Chinese dumping. So that's an area where we think there's a clear justification for protecting our industry with tariffs. And we're not the only country that feels that way.
Many European countries and others, including developing countries, are really suffering from this Chinese strategy of producing overcapacity. But President Biden is not proposing to put any broad-based tariffs in place, doesn't see that as a strategy that's desirable. And with respect to China, he hasn't removed the tariffs that Trump put in place.
But aside from what I mentioned, mentioned these areas, hasn't increased tariffs.
Schonberger: Secretary Yellen, we'll have to leave the conversation there. But thank you so much for your insight.
Secretary Yellen: My pleasure. Thank you