CNBC Transcript: United States Treasury Secretary Janet Yellen Speaks with CNBC’s Sara Eisen on “Closing Bell: Overtime” Today

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CNBC Transcript: United States Treasury Secretary Janet Yellen Speaks with CNBC’s Sara Eisen on “Closing Bell: Overtime” Today

Following is the unofficial transcript of a CNBC interview with United States Treasury Secretary Janet Yellen on CNBC's "Closing Bell: Overtime" (M-F, 4PM-5PM ET) today, Monday, May 8. Following is a link to video on

All references must be sourced to CNBC.

SARA EISEN: Thank you so much, Jon Fortt. And thank you, Secretary Yellen, for making time to talk to us today. Good to see you.

JANET YELLEN: Thank you. My pleasure. Thanks for having me.

EISEN: So you've been warning about this date, June 1, that we need to raise the debt ceiling or else it could be a disaster, a financial catastrophe. Can you just walk us through what that looks like if it doesn't get done? Because so far --

YELLEN: So our projection is that in early June, and possibly even as early as June 1, the Treasury will run out of cash and extraordinary measures that we're using to pay our bills while staying below the debt ceiling. And so something will have to give we just will not have if Congress doesn't raise the debt ceiling, we just will not have enough money at that time to be able to pay all of the bills the government owes and this would be really the first time since 1789, that a such a thing would have occurred. And it's really essential that Congress raise the debt ceiling so that we're not in a position of defaulting on our bills. It's something that could produce financial chaos, would drastically reduce the amount of spending, would mean that Social Security recipients and veterans and people counting on money from the government that they're owed, contractors, we just wouldn't have enough money to pay the bills. And I think it's widely agreed that this would be a huge hit to the economy and really an economic catastrophe.

EISEN: Just to gain that out further. So where do bondholders fit in in terms of the prioritization of who gets paid in a technical default? Do they get prioritized or is it just about paying the bills as soon as the money comes in?

YELLEN: Well, you know, I would say that if Congress doesn't raise the debt ceiling, the President will have to make some decisions about what to do with the resources that we do have. And there are a variety of different options, but there are no good options. Every option is a bad option. And I really don't want to get into discussing them and ranking them because as every Treasury Secretary has known, the only option that really leaves our economy in good shape is in our financial system is raising the debt ceiling and making clear that Congress stands behind the basic principle that America pays its bills. We're not a deadbeat country. And if that's compromised, even in the run up to it, if it looks like we're going to go up against the ceiling and may not get it done, that will have tremendously adverse effects on financial markets in the economy. So there just is no good option other than raising the debt ceiling.

EISEN: I know you've been having nonstop conversations about this behind the scenes, Secretary Yellen, report that you've been talking to business leaders, CEOs about this. I'm sure you're talking to members of both sides on the hill. What's your feeling? We're going into this big meeting between McCarthy and the President tomorrow. Three and a half weeks to go. Do you think there will be a deal done or are you pessimistic? It sounds like you're worried?

YELLEN: Well, clearly, there's a very big gap between where the President is and where the Republicans are. The President set out a detailed budget. In that budget, he invests in America. He cuts wasteful and inefficient spending and lowers deficits over 10 years by $3 trillion. But his and so he and I regard it as a fiscally responsible proposal. The Republicans have very different ideas. They want to focus on cutting spending, and the proposals that they have set out would entail draconian cuts, and really end the policies we've put in place to invest in our economy in clean energy. So they're far apart. But look, we need to have discussions and compromise over fiscal policy, spending totals and what spending goes for that's a normal budget process and the President hopes to establish a process for discussing and compromising on those issues, but he's not willing to do it with a gun to not only his head, more importantly, it's a gun to the head of the American people and the American economy because a failure to raise the debt ceiling is really saying, if the president and the Democrats don't agree to these draconian cuts, we're gonna do something to bring enormous harm to American households that rely on the government and need and need to have jobs. So Congress needs to raise the debt ceiling and we also need to have a negotiation over spending.

EISEN: Right. They just they want to do that together and you do not so clearly there's a rift we'll await any news. Tomorrow, as you know, you mentioned the world is watching Secretary Yellen there's there's been a lot of I would say politicization right now of the dollar. And and the fact that countries are making moves countries like China and Russia to use the dollar less and use, for instance, China's currency more in world trade. I know you have said that the dollar's reserve status is not at risk. But I do wonder if we make a mistake here on the debt ceiling, how that impacts the dollar's reserve status and the trajectory for that.

YELLEN: Well, if we were to compromise the credit rating of the United States, and even worse to default on the debt, I think that would have an adverse impact on the dollar's use as a reserve currency. The dollar is regarded in Treasury securities as the bedrock safe asset in the entire global financial system. It's trusted and it is the ultimate safe asset and a failure to raise the debt ceiling, impairing the U.S. credit rating would put that at risk. So that is a real concern.

EISEN: I want to also ask you about regional banks because the drama has not completely died down as you know and I'm wondering how you assess the level of stress right now in the banking system.

YELLEN: Well, we we continue to see some downward pressure on the stock prices of some regional and community banks. Their earnings are under some pressure and I think that's part of the reason. But, you know, I would say I would say that we had a couple of bank failures, banks that had rather unique characteristics of enormous reliance on uninsured deposits and very substantial market to market hits from higher interest rates that lowered the value of their assets. That situation threatened contagion. We intervened forcefully, I believe, both to reassure deposit holders that their assets and banks across America are safe and to improve liquidity to banks, and the banks now have stable deposits. We're not seeing substantial deposit runoff. So there are some pressures on stock prices but our banking system is well capitalized. It has asset, it has access to liquidity, and regulators stand ready to use the same tools we have in the past if there are further pressures that arise that could create contagion. You know, the regional banking and community banking system is very important in the United States. Regional and community banks add to competition and create opportunities for lending to consumers and to businesses that their needs are less well serviced by America's largest banks. So, the diversity we have in our banking system is a real strength.

EISEN: But there is this nagging question, Secretary Yellen, about whether all uninsured deposits across the U.S. banking system are indeed safe. I know there's been a somewhat implicit guarantee by you and by the actions we've seen, but are you working with Congress pressing Congress to expand insurance on uninsured depositors because we still don't really have a good clear answer here.

YELLEN: So the FDIC recently issued a report suggesting pros and cons and alternatives. We're reviewing that and we would stand ready to work with Congress to see if changes need to be made. But for the moment, we do have tools, other tools that we're using and can use again if we think that the troubles of any bank are creating a risk of contagion. Depositors need to feel comfortable that their deposits in America's banks are safe, and that's something we will use our tools to ensure and I believe that there is adequate capital and liquidity in America's banking system for Americans to realistically have that confidence.

EISEN: You mentioned some of the stabilizing fundamentals and yet the stock prices as you say continue to be under pressure. Saw that dramatically last week. And now there's blame on the short sellers. Would you support a temporary ban on short selling of banks?

YELLEN: This is a matter that's up to the SEC and this is something that has rarely been used, and when it has been used, I believe it was used in 2008. It's not clear that it made things better it may have made things worse, but market manipulation if it were being found that there's market manipulation, that's something the SEC certainly could take action against, but short selling more broadly, the bar is pretty high to to --

EISEN: Yeah, it sounds like you're not there yet. What about the impact on the economy of all this? We've all been on watch for credit tightening, just got a report this afternoon from the Fed that indeed, credit standards are tightening. We expected that and more interestingly, a big drop off in loan demand from banks. So I'm curious how you're assessing the economic impact of all this either way, it's not great for the outlook.

YELLEN: Well, just Fed's been tightening monetary policy and trying to tighten financial conditions and the sluice that came out this afternoon has been showing for some time that there is there has been an ongoing tightening of lending conditions and that is part of part of the process by which monetary policy works. But I'm not going to comment on Fed policy. But clearly this is something Chair Powell has discussed. The Fed is aware that tightening of credit conditions is something that will tend to slow the economy somewhat and I believe they are taking this into account and deciding on appropriate policy. So, you know, as I read it, the economy, look at the labor market report last Friday remains really solid, in some ways, pressures are easing slightly in the labor market, but not through a process of high layoffs or rising unemployment. We have more people entering the labor, labor force, the highest prime age worker labor force participation rate in many years, and job openings have diminished somewhat, some of the heat's coming out of the labor market, but in the context of a really strong solid labor market that's doing very well.

EISEN: And you have pushed back against the recession narrative over the last year and a half and has had been right. You know, it's like "Waiting for Godot" on this recession. At the same time, there is a worry that that we might have a perfect storm coming together toward the end of the year of the stimulus finally wearing off, all the lagged impact of Fed tightening and of course bank tightening coming at the same time as a result of these bank failures. So, can we really avoid a recession in this economy?

YELLEN: Well, I've said and I'll say again, I believe there is a path to bring inflation down in the context of continued strong labor market. I still think that path is there. But, of course, there are risks. The things you cited are all risks and can't rule out a recession, but I don't think that's the most likely path and I'm hoping that we will be on the good path to a so-called soft landing, lower inflation, continued strength in the labor market. And I think that's possible.

EISEN: Treasury Secretary Janet Yellen, thank you very much for the time today.

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