Banking turmoil will help the Fed fight inflation but won't trigger a recession, Janet Yellen says

• Janet Yellen said the banking turmoil will help the Fed fight inflation but won't trigger a recession.
• Banks tightening lending standards amid the sectoral instability could reduce the need for further interest-rate hikes, the Treasury Secretary said.

Treasury Secretary Janet Yellen said the recent turmoil in the banking sector could end the need for further interest-rate hikes and help the Federal Reserve fight inflation without tipping the US economy into a recession.

Financial institutions are turning more risk-averse in their lending operations following last month's collapse of Silicon Valley Bank and Signature Bank, reducing the flow of credit into the economy and effectively tightening monetary conditions, according to Yellen.

"Banks are likely to become somewhat more cautious in this environment. We already saw some tightening of lending standards in the banking system prior to that episode, and there may be some more to come," she told CNN's Fareed Zakaria in an interview that aired on Sunday.

"That does tend to lead to somewhat greater restriction and credit that could be a substitute for further pricing, further interest rate hikes that the Fed needs to make," she added.

The Treasury Department, the FDIC and the Fed moved last month to protect all depositors after the banks' failures, to help stave off a broader run on banks. Since then, deposit outflows have stabilized and "things have been calm," Yellen said.

Investors have been worried about the economic impact of the Fed's aggressive interest-rate hikes over the past year, which were aimed at taming inflation. But Yellen maintained the US central bank can pull off a "soft landing" and bring down inflation without sparking a severe and prolonged downturn.

The US economy is already on that path and mounting evidence suggests it can maintain a strong labor market while inflation cools, she added.

The latest payrolls report showed that the US added 236,000 jobs in March, while the unemployment rate fell slightly from 3.6% to 3.5% despite the Fed's rate hikes.

"I think the outlook remains one for moderate growth and continued strong labor market with inflation coming down," Yellen told CNN.