Treasury Deputy Secretary Wally Adeyemo: The U.S. Economy Has Momentum

Published on

Following is the unofficial transcript of a CNBC interview with United States Department of the Treasury Deputy Secretary Wally Adeyemo and CNBC’s Senior Congressional Correspondent Ylan Mui live during the CNBC Delivering Alpha conference today, Wednesday, September 28th.

Interview With Treasury Deputy Secretary Wally Adeyemo

YLAN MUI: Deputy Secretary, for joining us today, kicking off Delivering Alpha back in person for the first time since the pandemic. We really appreciate your time.

DEPUTY SECRETARY WALLY ADEYEMO: Well, it’s great to be here with you today.

Get The Full Henry Singleton Series in PDF

Get the entire 4-part series on Henry Singleton in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q2 2022 hedge fund letters, conferences and more


YLAN MUI: Great. Well, let's just get started because right now the markets and the economy are in a really uncertain place. We saw the ten-year Treasury yield hit 4 percent earlier today. We see markets and stock markets at 2020 levels.

We see the OECD and the World Bank saying that the world is going to be in recession, the U.S. included with that. We see what the Bank of England is doing around purchasing bonds. So when you consider all of those factors, lay out for us the base case at Treasury. Where do you all see the economy going over the next 12 months?

DEPUTY SECRETARY WALLY ADEYEMO: I think it's a great question. I think that our view starts from the standpoint that the American economy comes into a moment where there is some uncertainty from a position of strength. Consumer confidence is still high. Consumer and corporate balance sheets are healthy.

We have a great deal of momentum in the labor market in which we've gained more than 300,000 jobs over the last three months on average. So we come into this moment from a position of strength.

There are clearly headwinds, and you've mentioned a few of them, including inflation. And it's important for us to remember that that inflation was caused by two twin shocks that hit the global economy.

One, COVID-19, which continues to impact China, as we still see COVID lockdowns there, which are impacting growth there. And then inflation, which has been caused by Russia's unprovoked invasion of Ukraine.

The Fed and the United States has a primary role in terms of dealing with this, but the President and Congress have taken actions, including the Inflation Reduction Act, that are also helping to both bring down our debts, but also ensure that we're investing in expanding the economic potential of the U.S. economy going forward, as well as reducing important costs.

So we feel confident about the U.S. economy going forward. We think there's a path to bringing down inflation while still maintaining momentum in the U.S. economy and having a healthy labor market.

YLAN MUI: So the U.S. is in a position of strength currently. Do you believe that position of strength will continue over the next year, or do you see a recession on the horizon?

DEPUTY SECRETARY WALLY ADEYEMO: I see a path towards that continuing because we come into this with a great deal of momentum. You saw the Consumer Confidence Reports yesterday.

Balance sheets are very healthy, the labor market is extremely strong within the United States, and you can still see a situation in which we're able to bring down inflation but maintain a healthy labor market and ensure that going forward, the U.S. economy has momentum.

Over the course of the last year and a half, the President has been able to accomplish three pieces of legislation, two of them in a bipartisan manner, the CHIPS Act and the Bipartisan Infrastructure Act, which all three are going to help expand the productive capacity of the U.S. economy.

Which will mean that while we're bringing down inflation, we're also expanding supply in the economy that will give us the ability to make sure that we have sustainable growth as we come out of this high-inflation period.

YLAN MUI: So you're saying that your base case is still that what many investors believe is a very narrow path to a soft landing is possible?

DEPUTY SECRETARY WALLY ADEYEMO: Yes, I still think it's possible. And I think the thing that we have to grapple with is headwinds. There are a number of headwinds that are coming from abroad that we're going to have to navigate.

But as Secretary Yellen has said, we still see a path towards that. And I think we have to remind ourselves that the United States, more so than any country in the world, comes into this from a position of strength, given the investments that we've made and the strength of our labor market.

YLAN MUI: So do you have a back-up plan in case that scenario doesn't actually play out the way that you hope it will?

DEPUTY SECRETARY WALLY ADEYEMO: I think the reality is that right now, because of what Congress and President have done, we have the capacity to both take the steps that we need to to bring down inflation, but also to make the needed investments to make sure that the economy continues to grow after we've done so.

YLAN MUI: So I'm not going to ask you to comment on Fed policy because I know that's not going to go nowhere and I wouldn't ask you to overstep. But a lot of folks right now are worried that the Fed is pressing too hard on the brakes, they're hitting the brakes too hard, and that could throw the economy into recession.

What is the role of the Treasury, what is the role of Washington? If a recession does occur, what is the role of government in mitigating that blow for the American consumer, or is that part of the pain we're going to have to suffer in order to bring down inflation?

DEPUTY SECRETARY WALLY ADEYEMO: You're right, I'm not going to comment on Fed policy. I think --

YLAN MUI: You can comment on your role.

DEPUTY SECRETARY WALLY ADEYEMO: But I will comment on what we're doing. And I think it starts with us putting in place fiscal policies that are prudent. I think you saw that in the Inflation Reduction Act, where we are making long-term investments in the U.S. economy.

Secretary Yellen yesterday gave a speech about what we're doing in terms of investing in the clean energy future, which will not only address climate change, but will help support 2.65 million jobs.

YLAN MUI: But not everyone says that that's a prudent fiscal policy. Republicans, for example, are saying that's just government spending at a time when we're in a rising rate environment, and that's going to increase the U.S. debt load in the future.

You saw the market punish the pound for the deficit spending and the tax cuts that they're pursuing over in the U.K. So is government spending really the right response when we're potentially heading into a period of turmoil and downturn and rates are rising?

DEPUTY SECRETARY WALLY ADEYEMO: Two important points. One was the Inflation Reduction Act included debt reduction as well. So in addition to spending, there was debt reduction as part of this package. And not all spending is the same.

The spending in the Inflation Reduction Act is spent over time, and it's spending that's going to help expand the productive capacity of the economy.

It's not meant to be stimulative, it's not going to be spent in one year, and I think the markets are attentive to how governments are investing in their future because, ultimately, the thing that the United States has going for it is that we have one of the most productive economies in the world.

Making investments to make the economy more productive is going to be the type of thing that leads to better growth outcomes over time. It's critical that while we do that, we also think about debt sustainability.

And that's why the Inflation Reduction Act included steps that would bring down the debt, including modest increases in taxation and providing funding for the IRS to make sure that they're in a position to collect more of the taxes from wealthy Americans who may not be paying taxes.

Doing those two things at the same time, investing in debt reduction, as well as investing in our productive capacity, we think is a strategy that will lead to America being competitive over time. And it's one of the reasons why you see -- when I go to other countries and I travel, when I talk to investors, what they're talking about is making investments here in the United States.

The reason they want to make investments here in the United States is because of the investments that the federal government is making to unlock capital. I'm in New York now, and when I go out and I talk to private equity firms, more of them are talking about taking trips out to Ohio today than taking trips abroad because of the investments we've made in things like the CHIPS Act.

And we think that making those types of investments will make America a more attractive destination, not only for American capital, but for capital abroad. But we have to do that in a way that's mindful of the fact that we also need to make sure that we have long-term sustainability of our debts and deficits. That's why the President has called for modest increases in taxation in this country.

YLAN MUI: So you mentioned a couple of legislative achievements that Democrats have had over the past couple of months. We're now entering a period where, after the midterm elections in November, Democrats could potentially lose control of the House, control of the Senate, potentially control of both.

What is the legislative or the fiscal policy path forward if Democrats lose control of Congress? What are your priorities? What will you be able to get done?

DEPUTY SECRETARY WALLY ADEYEMO: So I'm not going to comment on the politics, but what I will say is that throughout his career, President Biden has worked in a bipartisan fashion.

And when we think about the three major pieces of legislation I've been talking about today, two of them were done in a bipartisan way: the bipartisan Infrastructure Act and also the CHIPS Act. We think that we have a path to finding a way to continue to legislate, regardless of what Congress looks like next year, because the things that the President wants to do aren't only Democratic priority, they're American priorities.

Think about the investment in infrastructure. It's an investment that many of the people in this room have been talking about the United States making for more than 20 years. We were able to get it done in a bipartisan way during this presidency.

If you think about the CHIPS Act, semiconductors are so critical to our economy, we learned even more about this during COVID-19. We were able to make major legislative progress on creating an ecosystem in the United States for this in a bipartisan way during this presidency. We think that we have the path to do that next year as well, regardless of what Congress looks like.

YLAN MUI: So what specifically, though, would you be looking to achieve? It seems like there were many policies that didn't make it into law that were originally in the President's Build Back Better Plan.

Would you be looking to pick up some of those items and thinking of things like the child tax credit? I'm thinking of things like childcare infrastructure. Are those the kinds of things that you would be looking to push forward in the last two years of his term?

DEPUTY SECRETARY WALLY ADEYEMO: The President has laid out a very clear agenda in terms of our economic priorities. They include making investments in things like our children and also in infrastructure going forward, as well as taking steps that will bring down our debts and deficits over time, including making sure that we have the types of tax reforms that will do that.

These are the things that we're going to continue to focus on because, again, they're good for America. Ultimately our goal has to be to take steps to bring down inflation in the economy. The President said that's our top goal, and that's where we're focused.

But as well as bringing down inflation, we need to make the needed investments in America to make sure that our economy is competitive in the future. You look around the world today and you see where the United States is positioned in terms of the strength of our labor market and also the strength of our underlying economy.

These things didn't happen by happenstance. They happened because of the investments we've made over time, and the President is committed to working with Congress to continue to make those investments over the course of his time in office.

YLAN MUI: What about more executive actions like canceling student loan debt? Do you see that being a lever that is pulled more often in a divided Washington?

DEPUTY SECRETARY WALLY ADEYEMO: So I'm not going to go into hypotheticals. I think what the President is committed to doing is taking all the steps that are necessary to make sure that the economy remains strong and that we are both in a position to compete globally, but that we drive towards a more sustainable economy in the United States as well.

YLAN MUI: Okay. So I actually have some good news for you out of Washington, which is that the Senate is moving forward on a Bill that would keep the government from shutting down on Friday. So that's a small win.

Take it when you get it, right? But importantly on that government spending measure, there is $12 billion that would go towards supporting Ukraine's efforts against Russia. Treasury and the Biden administration in particular has been instrumental in helping to build global consensus around ways to curtail Russia's influence and sort of ways to starve the country of revenue.

A lot of folks look around and say, what else can we do to tighten the screws on Putin? What is the strategy from Treasury and how long do you think we can still remain in this quagmire?

DEPUTY SECRETARY WALLY ADEYEMO: The reality is that what Treasury is doing, what the entire United States government is doing is providing support to the brave men and women in Ukraine. It's because of their bravery we're in a position where today you've seen in some areas Russian troops withdrawals.

And what Treasury is doing is we're supporting a whole government strategy that includes providing Ukraine with defensive weapons. And at Treasury and at the Commerce Department what we're doing is we're going after Russia's supply chain for their military industrialized complex by using sanctions and export controls to do things like deny their leading tank manufacturer's key equipment.

So today their two leading tank manufacturers are unable to produce tanks. We are denying them access to semiconductors that are critical to their precision missiles, which means they are unable to build the precision missiles they're using in Ukraine or using elsewhere.

In addition to going after their supply chain, we're very focused on reducing Russia's revenues because we want to make sure they have less money to both prop up their economy and continue their war effort in Ukraine. But fundamentally our goal is also to make sure that we're supporting the Ukrainian people and the Ukrainian economy.

That's why the continuing resolution that Congress is working through right now includes $4.5 billion for Ukraine, this is money that will help them pay for the basic things it takes to govern. And ultimately we want to make sure that we're in a position to help Ukraine rebuild that country, to make sure that it is a thriving country that demonstrates the power of democracy going forward.

YLAN MUI: What about price caps on Russian oil? This is something that Treasury has been pushing for very strongly. You guys have been spearheading that effort. You've been in favor of it. The G7 said that they were going to do it, at least in principle, but now in practice it looks like there's a lot more debate, a lot more concern about how that would be implemented. Do you think that's going to get done?

DEPUTY SECRETARY WALLY ADEYEMO: I do. And I think that one of the things we have to remember is that today we face high energy prices and high food prices throughout the world because of Russia's invasion of Ukraine and the risk premium they've introduced into the market.

The goal of the price cap is to make sure that Russia is in a position where they can continue to sell their oil but at reduced revenues. As you know, over the -- late in the spring, the European Union created a six package of sanctions that included the fact that Europe was no longer, as of December 5th, going to be purchasing Russian oil.

And at that point they were also going to make it impossible for European services, like insurance, to be used to ship Russian oil on sea. What the price cap does is it allows Russian oil to continue to flow using the services of G7 countries, but only if it's sold under a certain price in order to make sure that the world market remains well supplied but that we are reducing Russia revenue over time.

This is critical not only because it takes away revenues from Russia to continue its war of aggression in Ukraine but also because it helps to promote stability and global energy markets.

Which is critical to not only the United States and the G7 but also to developing economies who have been hit the hardest by Russia's invasion in Ukraine and today face elevated food prices and energy costs because of what Russia has done in Ukraine.

YLAN MUI: But where are you going to set the price? Isn't that one of the sticking points?

DEPUTY SECRETARY WALLY ADEYEMO: So the important thing about setting the price is that we're going to do it as a coalition. Our goal is to make sure that we are setting it well above the price of production in order to create incentives for Russia to continue to sell into the price cap coalition.

But ultimately if Russia decides that they're going to find services that are not G7 services, that's fine. Those services are going to cost Russia more, and the countries that negotiate outside the price cap are going to be in a better negotiating position with Russia because they know the price cap coalition and that price exists.

So we're going to work with our allies and partners to figure out the price. We're going to be transparent about that price to the world in order to put other countries in a position to better negotiate going forward.

YLAN MUI: What happens if you don't reach that agreement in practice by December 5thwhen the EU import ban starts to kick in? Are we going to see massive energy price spikes in the EU, in Europe, and at home?

DEPUTY SECRETARY WALLY ADEYEMO: So, Ylan, as you know, we've already reached an agreement. The G7 finance ministers announced that they had reached an agreement in the beginning of September.

Now each one of our jurisdictions are working through our domestic implementation process. The Office of Foreign Asset Control in the United States put out some sample guidance from the United States, and I know that our allies and partners around the world are doing the same.

Because we want to make sure that we're in a position where Russian energy can continue to flow but that we're reducing their revenues over time. That's something that all of us are committed to doing.

YLAN MUI: I want to stick with geopolitics and also ask you about the situation in Iran, the protest there after the killing of the woman who was not apparently wearing her head scarf properly. Treasury sanctioned the Iran morality police. Tell me about that decision and what you are hoping to achieve with those sanctions.

DEPUTY SECRETARY WALLY ADEYEMO: So our goal when we put in place sanctions overall is to try and change behavior and to try and make sure that we're finding those people who are taking actions that don't fit within the scope of well-defined values, like human rights, and taking that action was consistent with that.

But in addition to taking the actions to sanction those officials, we also granted a degree of relief to allow for Internet service to be turned on in Iran because the Iranian regime was denying the Iranian people the ability to communicate with each other using the Internet.

So we worked to make sure that we provided relief that would allow private actors to be able to provide the Internet for the brave Iranian people who are standing up to their regime.

YLAN MUI: We'll go back to recession. We talked a lot about the geopolitical headwinds now. Do you think that the danger of a recession or the catalyst for a recession is more likely to come from outside our shores or from the Fed here at home?

DEPUTY SECRETARY WALLY ADEYEMO: So as I said earlier, I think we have a number of headwinds that are coming from abroad and I think they start with --

YLAN MUI: Which one is worse?

DEPUTY SECRETARY WALLY ADEYEMO: We start with the idea that we had -- you still look at COVID, and COVID-19 is continuing to be a headwind as you see China continuing to implement lookdowns, and you see high inflation that isn't an American challenge, it's global challenge that's affecting developing economies.

And we're seeing central banks around the world adjust to that challenge and take actions to try and bring down inflation over time. I think our goal in the administration is to work closely to ensure that we're doing everything we can to manage those headwinds.

I think the three pieces of legislation, two of which were passed in a bipartisan fashion this year, put us in the best position to do that, because they both give us the ability to help bring down costs for the American people, while also investing over the long term.

In addition to that, we've taken a number of executive actions. You look at the SPR releases which have brought down the price of gas, which has had a major impact on consumer confidence going forward.

We are committed to doing everything we can to make sure that we're dealing with those headwinds and putting the American economy in the best position possible to succeed in order to ensure that we have a healthy labor market and the economy remains healthy.

YLAN MUI: But do you think it's really possible that the rest of the world's major economies fall into recession, see a sharp downturn, and the U.S. can escape unscathed?

DEPUTY SECRETARY WALLY ADEYEMO: As I've said, I think there's a path for us to continue to maintain economic momentum here in the United States. And I know that as I talk to my international counterparts, they're also taking steps to try and make sure that their economies continue to find a path towards growth.

You're right that they face a number of headwinds, including high energy prices, and they're taking steps to try and manage that in their countries.

What we can do here in the United States is exactly what we're doing now, which is what the President said: giving the Fed the room to do what it needs to do, and making sure that we support them and their independence, which we're doing, but also taking steps to invest here in the United States.

This is similar to what I know other countries are attempting to do to make sure that their economies continue to grow going forward, and we're going to stay coordinated and stay in communication with them as we move forward.

Ultimately, the thing we have to remind ourselves of is that the U.S. economy, like economies all over the world, are dealing with two shocks, two very big shocks: Russia's invasion of Ukraine and also the COVID-19 pandemic that continue to roil the global economy.

But that we're well positioned given the investments we've made over time to be able to manage those things so that we come out on the other side in a place where we have a healthy labor market and an economy that is prime to grow because of the investments we're making today.

And I know that a number of the people in this room, people who run businesses, I spend a great deal of time talking to them. And when we speak, all of them talk about the fact that demand still is strong, and for many of them they're still trying to find new people to come help them work at their firms to help fulfill demand.

Our goal has got to be to continue to make investments that make that a reality here in the United States for years to come.

YLAN MUI: Deputy Secretary, good luck walking that very narrow path. We appreciate it.

DEPUTY SECRETARY WALLY ADEYEMO: Thank you for having me.