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Yellen says interest rates may need to be raised to prevent the economy from overheating

Treasury Secretary Janet Yellen said Tuesday that the Federal Reserve could have to raise interest rates to prevent the economy from overheating if the Biden administration’s spending plans were enacted.

“Even though the additional spending is relatively small compared to the size of the economy, it may be necessary to raise interest rates somewhat to prevent the economy from overheating,” she pre-recorded in the future of the Atlantic Ocean. Said in an interview. Economic summit.

This statement is made in recent signs that inflation is recovering. The Ministry of Labor’s consumer price index rose 2.6% in the year ended in March, compared to a 1.7% rise in February. The Fed’s 2% inflation target is related to another indicator that tends to be a little lower.

Federal Reserve Board Chair Jerome Powell reiterated last week that the central bank was not concerned about a sustained rise in inflation and expected inflation to be temporary in the coming months. ..

“There is likely to be upward pressure on prices during this reopening,” Powell said in a press conference after the Fed’s policy meeting last week. “But these pressures are related to the resumption process and can be temporary.”

Despite improving economic outlook, most Fed officials expect to maintain ultra-low interest rates until 2023, according to forecasts submitted at the March policy meeting. Only seven of the 18 policy makers expected a rate of increase in 2022 or 2023.

Stock prices continued to slump after Mr Yellen’s comment. In recent transactions, benchmark 10-year Treasury yields fell from 1.606% on Monday to 1.580%, according to Tradeweb. Yields on short-term government bonds, which are particularly sensitive to changes in monetary policy, have remained almost unchanged. This suggests that this statement had little effect on investors’ interest rate expectations.

One factor behind the modest reaction of the market: Current yields show that investors are already expecting central banks to raise interest rates within the next few years. You will be patient with monetary tightening, as authorities have signaled. Yellen also just said that interest rates might need to be raised, not that they absolutely need to be raised.

“If the economy overheats, interest rates may need to be raised slightly, so that wasn’t a big change from the outlook,” said Larry Milstein, head of government and agency transactions at RW Pressprich & Co. I think. “

Yellen, a former central bank chairman, said Tuesday that the administration’s spending plans would include reallocation of resources within the economy, which “could cause some very modest rises in interest rates.” ..

But she says that making the US economy competitive and productive requires investments such as worker training, free community colleges, and more funding for R & D. I emphasized.

“I think they will help our economy grow faster,” she added.

White House spokeswoman Jen Psaki was asked if President Biden agreed with Yellen’s assessment, and on Tuesday afternoon the president did agree with the Treasury Secretary, and the White House warned of price pressures. He said he was paying.

“We also take inflation risk very seriously, and economic experts say that this is temporary and that profits far outweigh concerns,” she said. Stated.

“”
“I don’t think inflation will be a problem, but if it does, we have the tools to deal with it.”


— Treasury Secretary Janet Yellen

Some economists, including former Treasury Secretary Lawrence Summers, said this year’s surge in federal spending due to the $ 1.9 trillion Covid-19 bailout package enacted in March could cause unwanted inflation. I warned.

Yellen is in control of two new economic plans by Biden, one focused on infrastructure spending and the other focused on families, in an interview with NBC’s Meet the Press on Sunday. He expressed concern that it could spur impossible inflation. She said spending is high, but evenly distributed over eight to ten years. “Therefore, the increase in demand is modest.” The Biden administration has also proposed a tax increase for businesses and the wealthy, and authorities say they will pay the plan for over 15 years.

“I don’t think inflation will be a problem, but if it does, there are tools to deal with it,” she told NBC.

Mr Yellen’s remarks were unusual, as White House officials usually refrain from commenting on interest rate policy. It was the norm for decades, starting with the Clinton administration and before President Trump began to take part in the Fed’s actions and urged Powell to cut rates before the pandemic.

“Of all, Yellen certainly understands the role of independence and the Federal Reserve,” said Mr. Pusaki. “I think she simply answered the question and told her how she was balancing her decisions here.”

The IRS sent about 90 million stimulating checks to Americans in March. Greg Ip, WSJ’s Chief Economics Pundit, explains why stimulus checks alone are unlikely to spur inflation.Photo Illustration: Carlos Waters

Yellen seems to be addressing the interest rate system and what’s likely to happen without criticizing the Fed’s policies, said Peter Conti-Brown, an assistant professor at the Wharton School of the University of Pennsylvania. .. In that regard, he said her remarks were not uncommon for the Treasury Secretary.

But her comments could rank some Democrats in conflict as to whether the U.S. is near the point where debt growth and inflation concerns are likely to drive higher interest rates. He said.

“Yellen’s statement, even if she admits that a limit exists or is imminent, she definitely has a strong view, but she may want to strategically avoid the Biden administration. There is a risk of agreeing with the argument that it is not, “Conti Brown said.

Write to Kate Davidson at kate.davidson@wsj.com

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Yellen says interest rates may need to be raised to prevent the economy from overheating

Source link Yellen says interest rates may need to be raised to prevent the economy from overheating

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