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U.S. Treasury Secretary Janet Yellen warned on Tuesday that interest rates may need to rise over time to prevent the U.S. economy from overheating, which exacerbates sales of technological actions before clarifying their statements later.
The former Federal Reserve chairman made the comments in the context of the Biden administration’s $ 4 million infrastructure plans and healthcare spending over the next decade, instead of the $ 1.9 million economic stimulus that was already enacted this year due to the pandemic.
“Interest rates may need to go up a bit to make sure our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy,” he said in a event organized by The Atlantic magazine.
“Therefore, it could lead to very modest increases in interest rates to achieve this reallocation. But these are investments that our economy needs to be competitive and productive.”
Yellen’s statements caught the attention of investors and economists who have been intensely debating whether the $ 1 trillion in federal spending planned by Biden, combined with the rapid implementation of vaccination, will cause a shock of inflation this may force the Fed to intervene by tightening monetary policy.
The comments seemed inconsistent with Yellen’s previous views, shared by other Biden administration and Fed officials, that inflationary pressures in the US would be transitory. It also seemed to enter the arena of monetary policy, which Treasury secretaries often leave to the Fed.
In a post-board appearance for The Wall Street Journal on Tuesday afternoon, Yellen clarified his claims, saying the higher rates “are not something I’m predicting or recommending” and he didn’t think “there will be a problem.” inflationist “.
“If anyone appreciates the independence of the Fed. I think this person is me, ”added Yellen.
Yellen’s early comments added additional pressure to the shares of high-growth firms, whose future gains appear relatively less valuable when rates are higher and which had already fallen sharply at the start of the trading session. Tuesday. The Nasdaq Composite, which has had a lot of technology, ended the day down 1.9%, while the benchmark S&P 500 was down 0.7%.
However, market interest rates varied little, with a 10-year Treasury yield of 1.59%.
The Fed is still far from raising interest rates, saying the U.S. economy should reach full employment, with inflation at 2%, and be on track to surpass that level moderately for some time, before of the first upward movement.
Higher interest rates would ultimately be a reflection of the Biden administration’s success in fueling the U.S. recovery. But some investors fear that the Fed may be forced to act sooner and too aggressively if inflation rises uncontrollably and inflation expectations deviate.
Yellen said he believed the Fed had the “tools” to effectively control inflation if needed and stressed that Biden’s investment plans, if enacted, would be distributed over several years and not added to the North’s deficit Americans in a negative way.
“These investments will be gradually incorporated over time. The proposals we have are eight to ten years old and involve more modest spending increases and tax increases to pay them to a large extent, ”Yellen said at the WSJ event.
He added that he “frankly disagrees” with Larry Summers, the former U.S. Treasury Secretary, who warned that the $ 1.9 million stimulus plan was excessive and too risky from one perspective. of inflation.
In both appearances, Yellen stated that Biden’s spending plans would address the structural deficiencies that have plagued the American economy for a long time.
Biden’s $ 4 billion plans would fund infrastructure investments, child care, manufacturing subsidies and green energy to address a range of issues ranging from climate change to income and racial disparities. Yellen said those investments have been “really short or ignored” for too long.
When asked about her interactions with Fed Chair Jay Powell since she became Secretary of the Treasury, Yellen said they meet approximately “weekly” when the two are available.
“We have a wide range of issues that we are talking about, but it depends entirely on the Federal Reserve how they manage monetary policy. It’s something I’m not going to comment on. “
Earlier in the day, White House press secretary Jen Psaki said Biden “certainly agrees with his Secretary of the Treasury” and that inflation concerns were closely monitored in both the House. White as in the Treasury.
“We. . . Take inflation risk incredibly seriously, and our economic experts have conveyed that they think this would be temporary and that the benefits far outweigh the concern, “Psaki said.” [Yellen] it simply answered a question and conveyed how we balance decision-making here. “
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