Janet Yellen now sees a chance the US economy will avoid a recession as inflation is coming down

• Janet Yellen has turned more upbeat about the the US economy in view of the tight labor market. 
• It could see a "soft landing", the Treasury Secretary said, after previously flagging recession risks. 
• "The economy is fundamentally in good shape, and inflation is coming down," she said Friday, per Bloomberg.  

Treasury Secretary Janet Yellen has turned more optimistic about the US economy and the Federal Reserve's ability to avoid tipping it into recession.

Investors have fretted over the impact of the US central bank's aggressive interest-rate hikes. But Yellen suggested it will pull off a "soft landing" and bring down inflation without sparking a severe and prolonged downturn. 

Speaking at a briefing in India on Friday, she pointed to the strong US labor market as a key factor, Bloomberg reported. 

"I see a soft landing as being a possible outcome, and the one that I hope we will be able to achieve," Yellen said.

"The economy is fundamentally in good shape, and inflation is coming down if you measure it on a 12-month basis," she added. 

But the level of core inflation, which excludes volatile food and energy prices, is a sticking point.

"There's still work to do to get it down," Yellen said.

The Fed hiked interest rates from near zero to 4.75% over the past year to try to cool rapidly rising prices. Inflation has slowed from the 40-year high of 9.1%, but is still way above the Fed's 2% target, coming in at 6.4% in January.

Last month, Yellen flagged there was still a chance of a severe US economic slowdown, even though inflationary pressures were moderating. 

"I'm reasonably satisfied by the data that I've seen so far, but I don't want to minimize the risk of recession," the former Fed boss said at the time. 

Recent indicators have shown the economy is off to a good start to 2023. In January, the US added  517,000 jobs — more than double what economists expected — and retail sales rose 3% for their biggest monthly gain since March 2021.

Even with that robust job market and resilient consumer spending, the stubbornly high inflation has investors weighing whether the Fed could keep rates higher for longer than previously expected.

Some believe the central bank could raise its key policy rate by as many as 50 basis points at its next meeting in March, to make sure consumer price pressures don't rebound.

A reading on the Personal Consumer Expenditures price index — the Fed's preferred measure of inflation — is due later Friday.