Yellen Spooks Investors With Talk of Rate Hikes

Yellen Spooks Investors With Talk of Rate Hikes

REUTERS/Jonathan Ernst

Treasury Secretary Janet Yellen suggested in an interview with The Atlantic that interest rates may have to rise to keep the economy from overheating if President Joe Biden’s spending plans are enacted.

“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,” Yellen said In a prerecorded interview that aired Tuesday. “So it could cause some very modest increases in interest rates to get that reallocation, but these are investments our economy needs to be competitive and to be productive. I think that our economy will grow faster because of them.”

Interest rate policy is set by the Federal Reserve, not the Treasury Department, and current Fed chair Jerome Powell has said repeatedly that the central bank is not close to raising rates and believes that any rise in inflation will be short-lived. “We’ve been living in a world of strong deflationary pressures - around the world, really - for a quarter of a century, and we don’t think that a one-time surge in spending leading to temporary price increases would disrupt that," Powell said in testimony before Congress in March.

Still, the remarks by Yellen, a former Fed chair, appeared to contribute briefly to a stock market dip Tuesday, given that they “seemed to suggest that White House officials were acknowledging that inflationary pressures were a growing concern,” as The Washington Post put it. Asked about Yellen’s comments, the White House said that it was closely monitoring inflation. “We take inflationary risk incredibly seriously,” White House Press Secretary Jen Psaki said.

Some analysts cautioned, though, that Yellen was likely commenting on basic economics rather than monetary policy, and that her remarks should not be taken as a signal of any coming policy shift. “She was actually asked about the growing share of government spending to GDP and she was asked a very economist question and she answered in a very economist way, where interest rates to yields might have to rise a little bit for the reallocation of resources and the market read that as rates will have to rise,” Gennadiy Goldberg, interest rate strategist at TD Securities, told Reuters. “But I think they’ve already risen. They’ve gone from 1% to where we are now, so it’s certainly quite a bit already.”

Yellen clarified in a Wall Street Journal interview later in the day that she does not see Biden’s plans overheating the economy and was not predicting or recommending higher interest rates. She also reiterated that she does not expect inflation to become a problem. “I don’t think there’s going to be an inflationary problem, but if there is, the Fed can be counted on to address it,” she said.