Yellen says U.S. inflation easing as some sectors slow, labor market strong

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By Susan Heavey and David Lawder

WASHINGTON (Reuters) -The U.S. economy is strong amid robust consumer spending but some areas are slowing down, U.S. Treasury Secretary Janet Yellen said on Wednesday, adding that she expects continued progress in bringing inflation down over the next two years with a strong labor market.

Yellen, in a CNBC interview, also said that while banks may struggle with commercial real estate and face some consolidation, there is ample liquidity in the system and banks should generally be able to withstand any strain.

Yellen said that inflation can subside while maintaining a strong labor market, with unemployment in the 4% range, up slightly from the 3.7% reading in May.

"We've always thought an unemployment rate with four as the first digit is a very strong labor market," Yellen said. "Clearly, Americans feel good about their job prospects. They're finding work quickly."

She said the economy has slowed somewhat, easing pressures in the labor market, but "we still have a very healthy labor market, wage gains are significant."

Yellen said that legislation to lift the debt ceiling and reduce U.S. deficits by more than $1 trillion over a decade would support the Federal Reserve's efforts to bring down inflation.

Asked about former Richmond Federal Reserve President Jeffrey Lacker's view that the federal funds rate, at 5.0-5.25% now, will have to rise to 6% to tame inflation, Yellen said that was a decision for the Fed.

"Consumer spending has continued to grow in a pretty robust way, but you're also seeing areas of the economy that are slowing down," Yellen said. "And this is a judgment that my former colleagues at the Fed are very capable of making. As I said, I think what's important is to try to bring inflation down. That's a top priority."

REAL ESTATE STRESS

She said that banks would face some difficulties related to commercial real estate because of higher interest rates and remote work arrangements that have reduced demand for office space, but stress tests have shown that banks have adequate capital, and banking supervisors are looking closely at the situation.

"My overall read is that the level of capital and liquidity in the banking system is strong and while there will be some pain associated with this, that banks should be able to handle the strain," she said.

Asked whether she would support more consolidation among banks, she said the current diverse banking system with strong community banks, regional banks and large banks was a "strength" for the U.S. economy, but some further consolidation was likely.

Yellen said she would not want to see U.S. banking diversity threatened, "but certainly in this environment, some banks are experiencing pressure on earnings and there is a motivation to see some consolidation. And it wouldn't surprise me to see some of that going forward."

CRYPTO REGULATORY 'HOLES'

Yellen added that U.S. financial regulators have tools to protect U.S. investors and consumers on crypto assets, and it was appropriate for the Securities and Exchange Commission to examine these for further actions.

"And similarly, I see some holes in the system, where additional regulation I think would be appropriate. And we would like to work with Congress to see additional legislation passed," she said, without identifying these deficiencies.

Yellen also said many European Union and other countries are working to enact a 15% global corporate minimum tax agreed in 2021, but which Congress has not ratified. Other countries' collections of some taxes from U.S. firms under the global minimum levy may persuade Congress to adopt it, she said.