Yellen: Higher interest rates may be needed to prevent economy from 'overheating'
U.S. Treasury Secretary Janet Yellen said this week that the Federal Reserve may at some point have to raise interest rates to cool off an economy moving too fast.
“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,” Yellen said in a taped interview with The Atlantic, which aired Tuesday.
For its part, the central bank has insisted that it is not “thinking about thinking about” raising short-term interest rates from near-zero.
Fed Chairman Jerome Powell said last Wednesday that the economy appears a “long way” from its goals of maximum employment and inflation “moderately” overshooting its 2% target.
Yellen, who was Powell’s predecessor at the head of the central bank, elaborated at a separate engagement on Tuesday that she was not trying to jawbone the Fed into raising rates.
"Let me be clear, that’s not something I’m predicting or recommending," Yellen said at a Wall Street Journal event. "If anybody appreciates the independence of the Fed, I think that person is me."
Yellen's initial remarks on higher interest rates emphasized the need to “reallocate” economic resources as the Biden administration prioritizes its many proposed spending measures.
The administration has been moving forward on its multi-trillion dollar infrastructure bill.
“These are investments our economy needs to be competitive and to be productive,” Yellen said.
The Treasury secretary pointed to the need for more domestic research and development. She added that investments in early childhood education and paid leave were critical to boosting labor force participation among women.
Her remarks also mark the Treasury's acknowledgement of the risk of rampant consumption triggering excessive inflation.
But Yellen said she does not "anticipate that inflation is going to be a program."
As the economy continues to re-open through the national COVID-19 vaccination campaign, signs have already arrived showing that inflation will tilt higher. But Fed officials are cautioning that they are mostly the result of temporary and “transitory” factors, and unlikely to bring back the episodes of double-digit inflation seen in the late-1970s.
But Powell said last Wednesday that if that does happen, the Fed has the power to raise interest rates.
“This is not what we expect,” Powell said of the idea of 1970s-like inflation returning. “But no one should doubt that in the event, we would be prepared to use our tools.”
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
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