US Treasury Secretary Janet Yellen finally conceded that interest rates may need to modestly increase in response to an economy that is showing signs of significant overheating.
In a pre-recorded interview presented by the Atlantic, Yellen admitted that interest rates will need to rise in order to tame the economy’s burgeoning growth amid unprecedented government spending. “It may be that interest rates will have to rise somewhat to make sure our economy doesn’t overheat,” she said, adding that “even though the additional spending is relatively small relative to the size of the economy, it could cause some very modest increases in interest rates.”
Since the beginning of the Covid-19 pandemic, the US government has unleashed over $5.3 trillion in stimulus spending, resulting in a budget deficit above $3 trillion in 2020. However, the Biden administration does not plan to cap its spending anytime soon, and is now pushing for an infrastructure plan that could see a further $4 trillion spent on numerous longer-term projects.
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Yellen’s latest comments coincide with an ongoing debate on whether or not the Biden administration’s ambitious spending initiatives could force a cascade of price inflation. Both the administration and the Federal Reserve have dismissed worries of price pressures, instead noting that any inflation that does exceed the 2% target rate will only be “transitory.”
Despite calls of alarm among prominent economists and analysts, the Federal Reserve continues to insist that its dovish monetary policy must remain in place until the economy reaches full employment and any pandemic-related slack is eliminated. However, it now appears that Yellen may be stepping on Fed Chair Jerome Powell’s toes, by finally opening up to debate about getting the economy back to normalization.
Following Yellen’s remarks, the US dollar rose to a session high, while the yield on 10-year Treasurys pared declines.
Information for this briefing was found via the Atlantic. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
