Yellen says interest rates may need to increase

Treasury Secretary Janet Yellen on Tuesday said that interest rates may need to increase to keep the recovering economy from going into overdrive on the heels of significant government spending.

“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy,” she said in response to a question posed by The Atlantic about whether the economy could absorb the large dose of spending President Biden was proposing.

Critics of the major spending push have warned that it will push up prices, as government funds boost demand faster than production of supply can keep up.

Were inflation to take hold in a serious way, it would erode purchasing power, particularly for low earners, and could require interest rate hikes to get inflation back in line. An increase in interest rates could slow or even reverse the economic recovery.

In a later interview with the Wall Street Journal, Yellen somewhat walked back the remarks.

“Let me be clear, it’s not something I’m predicting or recommending,” she said. “I don’t think there’s going to be an inflationary problem, but if there is, the Fed can be counted on.”

Federal Reserve Chairman Jerome Powell has said that the recent uptick in prices is likely to be temporary and that he doesn’t expect interest rates to rise this year, but that the central bank is closely monitoring inflation.

Stock markets, which have in recent months sunk on signs of higher inflation and concerns about rising interest rates, did not react significantly to Yellen’s comments, which may have referred to market borrowing rates as opposed to the base rate set by the federal reserve.

Yellen said that the roughly $4 trillion that Biden has proposed in infrastructure spending and family support programs would ultimately boost the economy.

“These are investments our economy needs to be competitive and to be productive. I think that our economy will grow faster because of them,” she said.

When asked about the comments, White House Press Secretary Jen Psaki said Biden accepted the analysis.

“I think President Biden certainly agrees with his Treasury Secretary,” Psaki said, adding that the White House was taking inflationary risk “incredibly seriously” but leaving interest rate decisions to the Federal Reserve.

She dismissed the notion that the comment by Yellen, herself a previous Federal Reserve chair, was an attempt to influence or pressure the independent central bank.

Updated at 4:11 p.m.