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Markets

US interest rates may have to rise if economy heats up: Yellen

  • Though Yellen acknowledged the higher growth "could cause some very modest increases in interest rates," the United States needs the investments "to be competitive and to be productive."
05 May 2021

WASHINGTON: US interest rates may have to increase "somewhat" to keep a lid on inflation if President Joe Biden's latest spending proposals are enacted and the economy heats up, Treasury Secretary Janet Yellen said Tuesday.

But after her comments set off a mini-firestorm and sent stock prices tumbling, Yellen later clarified that she was not predicting nor suggesting the Federal Reserve should raise rates.

After winning approval for a $1.9 trillion pandemic rescue plan in March, Biden has made two more proposals totaling nearly $4 trillion over a decade and partially paid for with tax increases on corporations and the wealthy.

The goal is to revamp the US economy after the Covid-19 pandemic caused a severe downturn in 2020.

"It may be that interest rates will have to rise somewhat to make sure that our economy doesn't overheat," Yellen said in a pre-recorded conversation with The Atlantic.

However, she said "the additional spending is relatively small relative to the size of the economy" and is over a larger time frame than the pandemic rescue spending, which focused on immediate needs of workers and families.

Though Yellen acknowledged the higher growth "could cause some very modest increases in interest rates," the United States needs the investments "to be competitive and to be productive."

The Federal Reserve has pledged to keep interest rates near zero until employment recovers and inflation holds above its two-percent target level for some time, but economists and investors are increasingly sounding the warning that government spending will cause an inflationary spiral.

Fed Chair Jerome Powell and others have tried to tamp down those concerns, saying price increases in the short term are due to the rebound from the unprecedented impact of Covid-19, as well as temporary supply issues as economic activity resumes.