US Treasury Secretary Yellen: US recession risk is decreasing, consumer spending is expected to slow down, and there will be more bank mergers.

US Treasury Secretary Yellen believes that the risk of a recession in the US is decreasing and that the slowdown in consumer spending may be the cost of fighting inflation. In addition, there may be more bank mergers in the US this year.

Regarding the possibility of a US economic recession, Yellen said, "If there is one, I expect the likelihood has decreased. Because the labor market is resilient and inflation is declining. I wouldn't say there is no risk of an economic recession, because the Federal Reserve is tightening monetary policy."

Regarding consumption, Yellen said it is likely that we need to see a slowdown in consumer spending to control inflation.

Yellen pointed out that US inflation has indeed fallen a lot and will continue to fall, partly due to the expected adjustment in the real estate market. However, core inflation, which excludes food and energy, is still "quite high."

Regarding the debate among economists about whether the Federal Reserve should raise its 2% inflation target, because the target was adopted during a period of weak economic growth and investment, Yellen responded that such discussions are not appropriate as the Federal Reserve is trying to curb price spikes. At this week's congressional hearing, Federal Reserve Chairman Powell reiterated his refusal to change the 2% inflation target.

The CPI report released by the US last week showed that the core CPI, which excludes volatile food and energy, rose 5.3% YoY in May, lower than the previous value of 5.5%, and the lowest since November 2021, but slightly higher than the expected 5.2%; the core CPI rose 0.4% MoM, in line with expectations and the previous value. The overall CPI rose 4% YoY in May, down for the 11th consecutive month, the smallest YoY increase since March 2021, far below the peak of 9.1% reached in June last year.

Yellen expects that more US banks may seek mergers this year because higher interest rates and recent banking turmoil make it more expensive for them to retain depositors. Since the collapse of Silicon Valley Bank and Signature Bank in March, small and medium-sized banks in the US have seen their depositors turn to large institutions that they believe are less affected. In addition to the Fed's interest rate hikes, smaller banks are paying more interest to depositors.

The above situation has weakened the profitability of small and medium-sized banks, which may be reflected in the second-quarter bank earnings reports next month. Yellen believes that the instability earlier this year will not reappear, but weak profitability may put pressure on stock prices and may prompt some banks to merge. "I don't think this poses a huge threat to the banking industry, but eventually some banks may want to merge." Yellen did not disclose the list of banks she is watching.

Yellen said that more consolidation in the banking industry may be healthy, but she also warned the largest banks not to become larger. "We certainly don't want excessive concentration, we support competition, but that doesn't mean no mergers. The number of banks in the US is almost more than any country I know."

Yellen also talked about the risks the banking industry faces in commercial real estate lending. She said these risks are mainly in the loans small banks provide for office buildings. She expects office building loan defaults will not have a widespread impact, although this may lead to more bank failures. Smaller banks tend to be more conservative in lending. "This may bring some problems, but I think it is controllable, and I really don't think it is systemic."

The Wall Street Journal analysis pointed out that Yellen's latest statement on bank acquisitions is consistent with previous ones, but this time she gave a clearer signal that regulatory agencies are prepared for the turbulence in the banking industry's Q2 financial reports.