Yellen downplays recession fears, expects US economy to grow

World Bank could lend $50bn more over decade with reform

WASHINGTON: US Treasury Secretary Janet Yellen expects the world’s biggest economy will continue to grow, despite heightened recession concerns following recent turmoil in the banking sector. The dramatic collapse of Silicon Valley Bank (SVB) and Signature Bank last month had rattled the industry, prompting US authorities including the Treasury Department and Federal Reserve to step in to prevent contagion. While the situation has calmed, analysts warn that fallout from the recent instability could continue—as banks tighten lending standards, reducing available credit to households and businesses.

But Yellen told AFP in an interview: “I continue to anticipate that the US economy will grow and the labor market will remain strong, and inflation will come down.” Her comments came after JPMorgan Chase Chief Executive Jamie Dimon warned this week that the current crisis is not yet over and will be felt for years to come. While he noted that today’s conditions are nothing like during the 2008 financial crisis, he added that it was not clear when the problems would end. Asked about the matter, Yellen said she is committed to ensuring that all deposits are safe and monitoring banking system conditions.

Officials are also “prepared to use all of our tools as needed for any size of institutions to keep the system safe and sound,” she said. After SVB’s collapse, US authorities set out plans to ensure its customers would be able to access their deposits. A similar exception was announced for Signature Bank. The Fed and other major central banks later launched a coordinated effort to boost lenders’ access to liquidity. “Our banking system is sound and it’s resilient,” Yellen said, adding that it has strong capital and liquidity as well.

“The actions that we have taken are intended to reinforce that and to ensure broad public confidence,” she told AFP. The World Bank’s ongoing reform could result in a $50 billion lending boost over the next decade, Treasury Secretary Janet Yellen told AFP ahead of stakeholders’ meetings next week where key changes are expected to be announced. Central bankers, finance ministers and participants from more than 180 member countries are expected to gather in the US capital for the International Monetary Fund and World Bank’s spring meetings in the coming week. A key topic of discussion will be the World Bank’s evolution, amid a push for lenders to revamp and meet global challenges like climate change.

The United States is the largest shareholder of the World Bank Group. “I expect there to be an update of the bank’s mission to add building resilience against climate change, pandemics, and conflict and fragility to the core goals,” Yellen said in the interview with AFP Thursday. She added that there needs to be a recognition that these challenges aren’t separate or conflicting but rather, inextricably linked. “Second, there will be an announcement that the bank is stretching its financial capacity to meet these objectives, and adopting changes or endorsing changes that could result in an additional $50 billion in extra lending capacity over the next decade,” Yellen said.

The move would be a significant resource boost marking a 20 percent rise in the International Bank for Reconstruction and Development’s (IBRD) sustainable lending level. The IBRD is the World Bank’s middle-income lending arm. Seeking added reforms Yellen also said there would be an announcement on updating the bank’s operational model to “orient it towards the goals that we’re setting.” Among other things, this includes creating more incentives for the mobilization of both domestic and private capital. “We seek additional reforms during the rest of this year,” Yellen said.

In March, the World Bank submitted an evolution plan to be discussed with its development committee on April 12, during the spring meetings. Noting that World Bank President David Malpass has laid a “solid foundation” for the ongoing work, Yellen added that she expects US candidate Ajay Banga to be elected to the helm of the organization and continue the revamp. Banga was the sole nominee for the position after Malpass announced this year that he would step down early. ‘Hopeful sign’ Also on policymakers’ agendas next week are support for war-torn Ukraine and debt restructuring.

“We have seen some movement by China on participating in debt restructuring for Sri Lanka, which is a hopeful sign,” Yellen said. As global growth slows, the World Bank previously warned that the outlook is especially tough for the poorest economies—which face sluggish growth driven by heavy debt burdens and weak investment. Yellen had earlier said that China should move more quickly on some debt restructurings. Discussions on this front will continue next week as a newly formed global sovereign debt roundtable gathers, she told AFP.

“We’re having useful technical discussions on important elements of debt restructuring. China has been participating, and we all continue to press China for improvements,” she said. Washington will continue pushing for a speedier and more predictable operation of the G20 “common framework” for debt restructuring as well. On Ukraine, Yellen said: “Once again, we will work with all of our allies to insist that Russia cease its brutality in Ukraine.” She added that the United States would press for economic support alongside its partners on this front. – AFP

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