Janet Yellen says a government shutdown would add to risks of a recession

As a government shutdown looks increasingly likely, Treasury Secretary Janet Yellen is sounding the alarm about the damage it could do to the U.S. economy.

"It's really reckless and will impose immediate harm, which will intensify over time," Yellen said in an interview with NPR on Friday.

A big fear is a government shutdown could tip the U.S. economy into a recession. "I don't want to predict that," Yellen said. "But I think it's a risk factor."

At his last news conference, following the Federal Reserve's last meeting, Fed Chair Jerome Powell said a potential shutdown was on "a long list" of headwinds facing the U.S. economy.

Powell and his colleagues have been raising interest rates rapidly to get high inflation under control. And while there's been more optimism the Fed will be able to do that, Powell and Yellen have both acknowledged the inherent difficulty of that undertaking.

In an exclusive interview with NPR, Yellen emphasized a government shutdown could have an effect on the level of confidence businesses and consumers have in the economy.

"If it seems like we're suffering from political paralysis — and this inability to keep the government open seems to be a symptom of that — there could be a psychological toll that it takes," she said.

A longtime government policymaker, Yellen has been in government during previous shutdowns. But, she said, the run-up to this potential shutdown seems different.

"The problem is a very small, extreme group of Republicans that are holding a continuing resolution hostage in the House," she said. "I haven't seen something like that before, that such a small group of people could inflict such damage on the American people and the American economy."

Economists have noted that the damage a shutdown can do depends in large part on how long it lasts. The last one, in 2018 and 2019, lasted more than a month.

Yellen noted the White House Council of Economic Advisors estimates a shutdown would reduce quarterly annualized economic growth by 0.1 to 0.2 percentage points every week it goes on.

After a trip to the Port of Savannah, in Georgia, to deliver a speech on infrastructure investment, Yellen said the Treasury Department has begun preparing for a government shutdown, noting the majority of workers in the department would be furloughed.

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