By Andrea Shalal and David Lawder

WASHINGTON (Reuters) – The Biden administration’s spending on stimulus to keep the economy going during the COVID pandemic may have contributed “a little bit” to inflation, U.S. Treasury Secretary Janet Yellen said in an interview on CNBC on Wednesday.

Yellen stated that supply chain issues and shortages were the main factors driving up prices during the pandemic, but acknowledged that stimulus spending could also have played a role.

> “It may have contributed a little bit to the inflation, but by and large, inflation was a supply-side phenomenon,” Yellen said, marking a rare admission by Biden administration officials regarding the impact of their policies on rising prices.

The Biden administration and Democrats in Congress enacted the $1.9 trillion American Rescue Plan Act in March 2021, following over $3 trillion in COVID relief spending authorized during President-elect Donald Trump’s first administration in 2020.

These measures maintained paychecks for unemployed workers, covered rent, and deposited thousands of dollars directly into Americans’ bank accounts, driving significant increases in consumer spending amidst pandemic-induced shortages.

Yellen, who will leave office later this month, remains convinced that COVID-related spending was essential to prevent economic scarring, which can occur after downturns when prolonged unemployment leads to alienation from the workforce.

Price escalations were primarily attributed to shortages of goods from China and other nations that had shut down, resulting in inadequate supplies of semiconductors and components for production.

Yellen noted little progress in reducing prices recently but maintained confidence that U.S. inflation was on a “downward path.”

She indicated the labor market had cooled yet remained robust and recent U.S. economic data suggested that interest rates may stay elevated longer than anticipated.

RATES HIGHER

However, she expressed concern over growing uncertainties about future economic policies as Trump prepares to assume office on January 20. This uncertainty was affecting yields on longer-term Treasury debt, along with market expectations for prolonged higher interest rates.

Despite these higher rates, Yellen emphasized that the U.S. economy was performing well, characterized by strong consumer spending and investment.

With increased debt servicing costs, she stressed the importance of solidifying fiscal policy. Yellen warned that Republican efforts to defund the modernization of the Internal Revenue Service could lead to an $800 billion rise in the federal deficit over a decade.

She highlighted that extending Trump’s expiring personal income and small business tax cuts without offsets could escalate deficits by an additional $5 trillion over ten years.

> “So my hope is that this will be done in a responsible way, maybe focusing on middle class tax cuts and looking for additional revenue raisers,” she explained.

When discussing Trump’s non-governmental Department of Government Efficiency, which aims to find $2 trillion in annual budgetary savings, Yellen stated, “It’s hard to see how the math on that works” given the limited room in discretionary programs for cuts. Furthermore, she noted little political willingness among Republicans and Democrats to decrease Social Security and Medicare spending.