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Treasury Secretary Janet Yellen says higher interest rates may be needed so economy doesn't 'overheat

Published by Business Insider on Tue, 04 May 2021

<p><img src="https://static2.businessinsider.com/image/60463e182db4af00117e40f2-2400/AP21036751629099.jpg" border="0" alt="AP21036751629099" data-mce-source="Jacquelyn Martin/AP" data-mce-caption="Janet Yellen has previously warned about the illegal use of cryptocurrencies like bitcoin"></p><p></p><bi-shortcode id="summary-shortcode" data-type="summary-shortcode" class="mceNonEditable" contenteditable="false">Summary List Placement</bi-shortcode><p>Treasury Secretary Janet Yellen is among the country's most experienced economic policy experts.</p><p>A veteran of the Clinton and Obama administrations, Yellen has long been <a href="https://foreignpolicy.com/2021/04/01/janet-yellen-mario-draghi-italy-united-states-technocrats-capitalist-democracy/">characterized</a>&nbsp;as an economist closely associated with the center-left. That changed after the slow recovery from the Great Recession saw her transform into an ultra-dove, urging stimulus to hasten the recovery in 2010.</p><p>Now, as Treasury Secretary for President Joe Biden, she&nbsp;presides over a level of stimulus unseen since World War II&nbsp;and she is sounding suddenly hawkish, especially in her remarks which aired Tuesday that&nbsp;higher interest rates might be necessary to keep the economy from overheating.</p><p>As one of the Biden administration's top economic policy chiefs, her comments suggest the White House might be taking a more conservative approach to the economic recovery. And although the Fedwhich sets interest ratesoperates independently of the administration, Yellen's statement conflicts with the central bank's own lower-for-longer outlook.</p><p>After roughly a year of virus-induced lockdowns and dire economic fallout, the US is <a href="https://www.businessinsider.com/biden-infrastructure-care-plans-janet-yellen-promise-big-return-economy-2021-5">expected to rebound</a> throughout 2021 as vaccines open the door to a full recovery. Acceleration of hiring and consumer spending have led economists to lift their growth forecasts, something that would ordinarily lead the Fed to raise interest rates. But the Federal Reserve has remained steadfast in its plans to hold its benchmark interest rate near zero through 2023.</p><p>The central bank has argued that maintaining such accommodative monetary policy will support the push toward maximum employment. Yet some fear that low rates, when coupled with President Joe Biden's massive spending plans, will lead the economy to run above its potential and drive rampant inflation. Famed economist Larry Summers in March characterized the administration's stimulus efforts as the "<a href="https://www.businessinsider.com/larry-summers-macroeconomic-policy-biden-economy-inflation-covid-relief-2021-3">least irresponsible</a>" fiscal policy of the last four decades and warned of stifling inflation.</p><p>Yellen surprisingly lent some credence to those worries during an interview aired Tuesday.&nbsp;The administration's latest spending proposals would reallocate capital to struggling pockets of the economy, but their scope could require some policy shifts, she said.</p><p>"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," the former Fed&nbsp;chair said during <a href="https://econsummit.theatlantic.com/">The Atlantic's Future Economy Summit</a>. "It could cause some very modest increases in interest rates to get that reallocation, but these are investments our economy needs to be competitive and to be productive."</p><p>The statement marks a sharp contrast from not just the Fed's messaging, but the administration's past remarks as well. The central bank has repeatedly said it expects inflation to trend higher as the economy reopens before fading back to a more moderate level soon after. Biden's Council of Economic Advisors expressed a similar outlook in an April <a href="https://www.whitehouse.gov/briefing-room/blog/2021/04/12/pandemic-prices-assessing-inflation-in-the-months-and-years-ahead/">blog post</a>, adding the White House will keep an eye out for "any signs of unexpected price pressures."</p><p>It's not the first time Yellen's hawkishness has butted heads with the administration's ambitions. The Treasury Secretary indicated to the White House that she would be an "obstacle" to deficit spending, according to a report from The American Prospect, dashing Progressives' hopes for <a href="https://www.businessinsider.com/aoc-biden-infrastructure-spending-plan-trillions-housing-health-care-recovery-2021-4">huge spending on a wide range of investments</a>.</p><p>Biden's plans to offset new spending with an array of tax hikes signals he and Yellen are moving in lockstep. The White House backed up the notion on Tuesday.</p><p>"The president certainly agrees with his Treasury Secretary," White House Press Secretary Jen Psaki said in a press conference, adding "Yellen certainly understands" the Fed's independence from the administration.</p><p>Inflation is only just starting to appear as state and local governments gradually reopen their economies. The government's quarterly report on economic growth showed prices climbing at <a href="https://www.businessinsider.com/inflation-outlook-pce-index-q1-reopening-recovery-stimulus-gdp-report-2021-4">nearly a decade-high rate</a> in the first three months of the year. Factory bottlenecks, strengthening consumer demand, and supply-chain disruptions all stand to <a href="https://www.businessinsider.com/why-supply-shortages-economy-inventory-chips-lumber-cars-toilet-paper-2021-5">drive price growth higher still</a> in the months ahead.</p><p><s></s> The country will eventually need to reach a "sustainable fiscal course," but with interest rates near zero, now is the time to invest in the economy, the Treasury Secretary said.</p><p>"We've gone for way too long letting long-term problems fester in our economy," Yellen said. "I think we have a reasonable amount of fiscal space."</p><p><a href="https://www.businessinsider.com/janet-yellen-economy-overheating-interest-rate-hikes-inflation-outlook-recovery-2021-5#comments">Join the conversation about this story &#187;</a></p> <p>NOW WATCH: <a href="https://www.businessinsider.com/racist-origins-marijuana-prohibition-legalization-2018-2">How racism contributed to marijuana prohibition in the US</a></p>
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