By David Lawder

CLEVELAND (Reuters) -U.S. Treasury Secretary Janet Yellen said on Thursday that new GDP data shows strength in the U.S. economy but also some evidence of a healthy slowdown that could have a positive impact on fighting high inflation

Speaking to reporters on a trip to Cleveland to tout the Biden administration’s economic policies, Yellen said she still does not anticipate a recession, but the U.S. government has fiscal capacity to respond to economic weakness if appropriate.

The U.S. economy grew 2.6% in the third quarter, rebounding after contractions earlier this year, but the Commerce Department data overstated the nation’s economic health as domestic demand was the weakest in two years because of the Federal Reserve’s aggressive interest rate hikes.

“This is certainly a full employment economy with a hot labor market, which is good, but we want to see growth slow,” Yellen said. “It’s part of getting inflation under control.”

“I’ve said many times I see a path to bringing inflation down while maintaining a strong labor market. And I think this data is consistent with what we would want to see,” Yellen added.

Yellen said that she expects the economy to slow further, and the government has fiscal space to respond if necessary, but cautioned that this should not work against monetary policy.

“We need to be careful not to use fiscal policy to exacerbate an inflationary problem,” Yellen said. “But if there were — which I don’t expect — but if there were a deep recession, that was something that called for a response, I think we continue to have enough fiscal space to do so.”