Treasury Secretary Janet Yellen said interest rates may have to rise modestly to prevent the U.S. economy from overheating due to higher levels of government spending, without specifying a timeframe.
“It may be that interest rates will have to rise somewhat to make sure our economy doesn’t overheat,” Yellen said in an interview with the Atlantic recorded Monday that was broadcast on the web on Tuesday. “It could cause some very modest increases in interest rates.”
Stocks extended their losses on Tuesday and the dollar briefly touched session highs after Yellen’s remarks. The yield on 10-year Treasuries pared declines.
The comments from Yellen, a former chair of the Federal Reserve, come amid a debate on whether President Joe Biden’s raft of proposed and enacted government spending could spur a surge in price pressures. Administration and Fed officials both have consistently dismissed concerns over accelerating inflation. They’ve argued that price increases expected this year will be largely transitory, and that the central bank has the tools to contain any persistent effects.
When Fed officials last issued projections, in March, they forecast no move in interest rates until at least 2024.
Yellen insisted that the heavy spending Biden is calling for would provide a net benefit to the economy, even if interest rates do go up.
“These are investments our economy needs to be competitive and to be productive, and I think our economy will grow faster because of them,” Yellen said.
The Biden administration has proposed additional spending packages totaling about $4 trillion on top of the $1.9 trillion it pumped into the economy beginning in March to combat the impact of the Covid-19 pandemic.
“This has a demand effect on the economy but really it’s going to have important supply effects on the economy,” Yellen said.
This article was provided by Bloomberg News.