WASHINGTON – Treasury Secretary Janet L. Yellen said higher interest rates may be needed to prevent the economy from overheating given the large investments the Biden administration is proposing to rebuild the country’s infrastructure and redo its workforce.
The comments, released online Tuesday at the Atlantic Future Economy Summit, come amid heightened concern from some economists and businesses that the United States is in a period of higher inflation as stimulus money is flowing through the economy and consumers are starting to spend again.
The Secretary of the Treasury has no role in setting interest rate policies. It is the competence of the Federal Reserve, which is independent of the White House.
But the words of Ms Yellen, former Fed chair, carry considerable weight, and her comments have been grabbed by investors and critics alike who have said she wielded undue influence over her previous monetary policy portfolio. In separate remarks later Tuesday, Ms Yellen made it clear that she respects the independence of the central bank and does not make a recommendation.
The stock market, which had fallen at the start of the session, fell further after Ms Yellen’s initial comments. Shortly before noon, the S&P 500 hit its worst level of the day, down 1.5%. The stocks of some high-growth tech companies – which are particularly sensitive to the risk of rising interest rates – were hit hard and weighed on the market. But the blue chip index cut those losses in half in the afternoon, ending the trading day down just 0.7%.
Jerome H. Powell, the chairman of the Fed, said last month that the central bank is unlikely to raise interest rates this year and officials want to see more healing in the US economy, they will consider withdrawing their support by slowing government-backed bond purchases. and increased borrowing costs.
As the Fed watches for signs of inflation, Powell and other Fed officials have said they believe any price hikes will be temporary. On Monday, John C. Williams, chairman of the Federal Reserve Bank of New York, said that while the economy is recovering, “the data and conditions we are seeing now are not enough” for the Fed policies “could change the stance of its monetary policy.” “
Ms Yellen did not predict a huge spike in interest rates, which have been close to zero since March 2020. But she said “modest” increases may be needed as the economy recovers from the pandemic crisis and as the administration tries to push through infrastructure and other investments aimed at making the United States more competitive and productive.
“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,” Ms. Yellen said when he was asked if the economy can handle the kind of robust spending the Biden administration is proposing.
“I think our economy will grow faster because of them,” Ms. Yellen said of the proposed investments, such as spending on research and development.
The Biden administration has proposed spending around $ 4 trillion over a decade and would pay for the plan with tax increases on businesses and the wealthy.
Ms Yellen’s comments drew criticism on Tuesday among those who believed she was overstepping her limits in weighing on monetary policy.
“Treasury secretaries shouldn’t be talking about the Fed key rate, and Fed governors shouldn’t be talking about US dollar policy,” Tony Fratto, former Treasury and White House official under administration Bush, said on twitter.
Francesco Bianchi, a Duke University economist who co-authored a 2019 research article on the impact of former President Donald J. Trump’s tweets on perceptions of Fed independence, called the comments Ms. Yellen’s “ unhappy as far as the Fed is doing everything it can. to convince the markets that interest rates will stay low. However, he did not believe that Ms. Yellen’s remarks were in fact inappropriate.
It is not clear that the comment qualifies as central bank interference because Secretary Yellen was describing what she thought would happen as the economy recovers and the Biden administration implements its policies “Mr. Bianchi said in an email. “In other words, she didn’t ‘recommend’ that the Federal Reserve follow any particular policy, but she seemed to think about how interest rates generally behave as the economy improves. . “
Asked about Ms Yellen’s comments, Jen Psaki, White House press secretary, said the Treasury Secretary was not trying to tell the Fed what to do or hinder the independence of the central bank with its commentary on interest rates.
“I would say, of all people, Secretary Yellen certainly understands the independence and role of the Federal Reserve, and I think she was just answering a question and explaining how we balance decision-making here,” a Ms. Psaki said.
Speaking at a Wall Street Journal CEO Council event Tuesday afternoon, Ms Yellen echoed the sentiment. She said she was not prescribing a rate hike and rejected the idea that she would ever try to infringe on the independence of the Fed.
“Let me be clear, this is not something that I predict or recommend,” Ms. Yellen said of the interest rate hike. “If anyone appreciates the independence of the Fed, I think it’s me.”
Matt phillips contribution to reports.