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Yellen says supply chain shortages main inflation spike

culprit

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Biden's $1.9 trillion COVID bill avoided 'scarring,'

Yellen says

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Higher bond yields reflect policy uncertainty, rate

path-Yellen

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More sustainable US fiscal path needed, Yellen tells CNBC

(Adds details on Biden, Trump COVID spending, paragraphs 4-5,

details on bond yields, fiscal policy, paragraphs 10-15)

By Andrea Shalal and David Lawder

WASHINGTON, Jan 8 (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 said supply chain issues and shortages were the main

factor driving up prices during the pandemic, but conceded that

stimulus spending could have played a role as well.

"It may have contributed a little bit to the inflation, but

by and large, inflation was a supply-side phenomenon," Yellen

said, in a rare concession by Biden administration officials

about the role their policies played in driving up prices.

The Biden administration and Democrats in Congress enacted

the $1.9 trillion American Rescue Plan Act in March 2021, after

more than $3 trillion in COVID relief spending approved during

President-elect Donald Trump's first administration in 2020.

These actions kept paychecks flowing for idled workers,

paid rent and put thousands of dollars directly into Americans'

bank accounts, fueling sharp increases in consumer spending at a

time when the economy was plagued by pandemic-driven shortages.

Yellen, who leaves office later this month, said she remains

convinced the Biden administration's COVID spending had been

needed to prevent economic scarring, as had been seen after

previous downturns. Economic scarring happens when business

closures and layoffs result in people suffering long periods of

unemployment that leave them alienated from the workforce.

Price increases were largely due to shortages of goods

coming from China and other countries that had also shut down,

which left automakers and others with insufficient

semiconductors and other components to produce goods.

Yellen said there had not been much progress in lowering

prices in recent months, but she remained convinced that U.S.

inflation was on a "downward path."

She said the labor market had cooled but was in a good

state, and recent U.S. economic data suggested that interest

rates could remain higher than people had expected.

RATES HIGHER

But she said there was also increased uncertainty about the

future of economic policies as Trump prepares to take office on

Jan. 20. This was helping to increase yields on longer-term

Treasury debt, along with market anticipation of higher interest

rates for longer, she said.

Despite higher rates, she said the U.S. economy was

doing very well, with solid consumer spending and investment.

But with higher debt servicing costs, it was imperative to

put fiscal policy on a sustainable course. She added that moves

by Republicans to defund the modernization of the Internal

Revenue Service could result in an $800 billion increase in the

federal deficit over a decade.

Extending Trump's expiring personal income and small

business tax cuts without offsets would boost deficits by

another $5 trillion over 10 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 said.

Asked about Trump's non-governmental Department of

Government Efficiency, which co-chair Elon Musk has said wants

to find $2 trillion in annual budgetary savings, Yellen said it

was "hard to see how the math on that works" with little room in

discretionary programs for cuts. There also was little political

appetite among both Republicans and Democrats to reduce Social

Security and Medicare spending, she added.