By Kate Davidson
WASHINGTON -- Treasury Secretary Janet Yellen said Tuesday that
it is possible the Federal Reserve may have to raise interest rates
to keep the economy from overheating if the Biden administration's
spending plans are enacted.
President Biden has proposed roughly $4 trillion of new spending
on infrastructure and social programs over the next decade,
including funding for roads and bridges, research and development,
affordable child care and paid family leave.
"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 a prerecorded interview at the Atlantic's
Future Economy Summit.
The remarks come amid recent signs that inflation is picking up.
The Labor Department's consumer-price index jumped 2.6% in the year
ended in March, compared with a 1.7% rise in February. The Fed's 2%
inflation goal is linked to a different measure that tends to run a
Fed Chairman Jerome Powell reiterated last week that the central
bank isn't worried about a persistent rise in inflation and that he
expects that price increases over the coming months will be
"During this time of reopening, we are likely to see some upward
pressure on prices," Mr. Powell said at a press conference
following the Fed's policy meeting last week. "But those pressures
are likely to be temporary as they are associated with the
Despite an improving economic outlook, most Fed officials
expected to maintain ultralow interest rates through 2023,
according to projections submitted at their March policy meeting.
Just seven of 18 policy makers anticipated lifting rates in 2022 or
Stocks remained lower after Ms. Yellen's comments. In recent
trading, the yield on the benchmark 10-year U.S. Treasury note was
1.580%, according to Tradeweb, down from 1.606% Monday. Yields on
shorter-term Treasurys, which are especially sensitive to changes
in monetary policy, were also little changed -- suggesting the
remarks had little impact on investors' interest-rate
One factor behind the market's muted response: current yields
indicate investors already expect the central bank to raise
interest rates within the next couple of years -- partly, investors
and analyst say, due to optimism about the economic rebound and
partly due to skepticism that the Fed will be as patient in
tightening monetary policy as officials have signaled. Ms. Yellen
also only said that rates may have to rise, not that they would
definitely need to.
The message was that "rates may need to be slightly higher if
the economy overheats, so I don't think that was a major change
from the outlook," said Larry Milstein, head of government and
agency trading at R.W. Pressprich & Co.
Ms. Yellen, who previously served as chairwoman of the central
bank, said Tuesday the administration's spending plans would
involve some reallocation of resources within the economy, which
"could cause some very modest increase in interest rates."
But she emphasized that the investments, such as worker
training, free community college and more funding for research and
development, are needed to make the U.S. economy competitive and
"I think that our economy will grow faster because of them," she
Asked whether President Biden agreed with Ms. Yellen's
assessment, White House spokeswoman Jen Psaki told reporters
Tuesday afternoon that the president certainly agrees with his
Treasury secretary and that the White House is keeping a close eye
on price pressures.
"We also take inflationary risks incredibly seriously, and our
economic experts have conveyed that they think this would be
temporary and that the benefits far outweigh the concern," she
Some economists, including former Treasury Secretary Larry
Summers, have warned that a burst of federal spending this year
stemming from the $1.9 trillion Covid-19 relief package enacted in
March could prompt unwelcome inflation.
In an interview Sunday on NBC's "Meet the Press," Ms. Yellen
played down concerns that Mr. Biden's two new economic plans -- one
focused on infrastructure spending and another on families -- would
spur uncontrolled inflation. The spending, while large, would be
spread out evenly over eight to 10 years, she said, "so the boost
to demand is moderate." The Biden administration has also proposed
tax increases on corporations and the wealthy that officials say
would pay for the plans over 15 years.
"I don't believe that inflation will be an issue, but if it
becomes an issue, we have tools to address it," she said on
Ms. Yellen's remarks were unusual because White House officials
typically refrain from commenting on interest-rate policy. That was
the norm for decades, starting in the Clinton administration, until
President Trump began weighing in on the Fed's actions and urging
Mr. Powell to cut rates before the pandemic.
"Of all people, Secretary Yellen certainly understands that
independence and the role of the Federal Reserve," Ms. Psaki said.
"I think she was simply answering a question and conveying how we
balance decision making here."
--Alex Leary and Sam Goldfarb contributed to this article.
Write to Kate Davidson at email@example.com
(END) Dow Jones Newswires
May 04, 2021 15:33 ET (19:33 GMT)
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