U.S. Treasury Secretary Janet Yellen warned on Tuesday that interest rates may have to rise over time to prevent the U.S. economy from overheating, exacerbating a massive sell-off in tech stocks before clarifying her comments later in the report. day.
The former Federal Reserve chairman made the comments in the context of the Biden administration’s plans for $ 4 billion in infrastructure and social spending over the next decade, rather than the $ 1.9 billion economic stimulus already implemented this year due to the pandemic.
“Interest rates may need to increase somewhat to ensure our economy does not overheat, even though the additional spending is relatively small relative to the size of the economy,” she said. at an event organized by The Atlantic magazine. .
“So that could result in very modest increases in interest rates to get that reallocation. But these are investments that our economy needs to be competitive and productive. “
Yellen’s remarks caught the attention of investors and economists alike who have been hotly debating whether the trillions of dollars in federal spending planned by Biden, combined with the rapid rollout of the vaccine, will trigger a shake-up. inflation which could force the Fed to intervene by tightening monetary policy.
The comments seemed at odds with Yellen’s previous views, shared by other officials in the Biden administration and the Fed, that any inflationary pressure in the United States would be transitory. She also appeared to enter the monetary policy arena, which Treasury Secretaries typically leave to the Fed.
In a subsequent appearance on the Wall Street Journal CEO Council Tuesday afternoon, Yellen clarified her remarks, saying higher rates were “not something I predict or recommend” and that she did not think there would be “an inflationary problem”.
“If anyone appreciates the independence of the Fed. I think that person is me, ”added Yellen.
Yellen’s initial comments added additional pressure on stocks of high-growth companies, whose future earnings look relatively less valuable when rates are higher and which had already fallen sharply at the start of Tuesday’s trading session. The high tech Nasdaq Composite ended the day down 1.9%, while the benchmark S&P 500 was 0.7% lower.
Market interest rates, however, were little changed, with the 10-year Treasury yield standing at 1.59 percent.
The Fed is still a long way from raising interest rates, saying the US economy is expected to reach full employment with inflation reaching 2% and on track to exceed that level moderately for a while, before the first move on the rise.
Higher interest rates would ultimately reflect the success of the Biden administration in fueling the US recovery. But the fear of some investors is that the Fed could be forced to act sooner and too aggressively if inflation spikes out of control and inflation expectations relax.
Yellen said she believed the Fed had the “tools” to effectively control inflation if needed and stressed that Biden’s investment plans, if passed, would span several years and would not would not increase US deficits negatively.
“These investments will be phased in over time. The proposals we have are for eight to ten years, and involve more modest increases in expenses and increases in taxes to largely pay for them, ”Yellen said at the WSJ event.
She added that she was “frankly at odds” with Larry Summers, the former US Treasury Secretary, who warned that the $ 1.9 billion stimulus package was excessive and too risky from a government perspective. ‘inflation.
In both appearances, Yellen argued that Biden’s spending plans would remedy the structural deficiencies that plagued the American economy for a long time.
Biden’s $ 4 billion plans would fund investments in infrastructure, child care, manufacturing subsidies and green energy to tackle a wide range of issues from climate change to incomes and racial disparities. Yellen said these investments had been “really changed or ignored” for too long.
Asked about her interactions with Jay Powell, the Fed chairman, since becoming Treasury secretary, Yellen said they meet on roughly a “weekly basis” when they are both available.
“We have a wide range of issues that we talk about, but it’s entirely up to the Federal Reserve, how it manages monetary policy. This is something on which I will not give an opinion. “
Earlier today, Jen Psaki, the White House press secretary, said Biden “certainly agreed with his Treasury Secretary” and that inflation concerns were being closely watched both at the White House and Treasury.
“We… Take inflationary risk incredibly seriously, and our economics experts have indicated that they think it will be temporary and that the benefits far outweigh the worry,” Psaki said. [Yellen] was simply answering a question and explaining how we balance decision making here. “