Janet Yellen: Higher interest rates would accommodate the economy

Janet Yellen said higher interest rates would be good for the Fed and U.S. economy. Yahoo Finance’s Brian Cheung shares the details.

Video Transcript

JULIE HYMAN: But we start this morning with Janet Yellen and her comments Bloomberg News about inflation and whether she's concerned about it. Well, if she's not. Let's bring in Brian Cheung on those comments. And she basically said, you know, we've been trying for a long time to get inflation up to a certain level. And so she doesn't seem particularly concerned about the current bout of inflation that we are seeing.

BRIAN CHEUNG: No. And that's definitely not a surprise given the fact that Janet Yellen, the Treasury Secretary, in addition to the White House is trying to work on that pretty aggressive infrastructure plan, which is going to cost a pretty penny. So no surprise that she's saying, well, the economy is not necessarily in a place where we see it overheating right now.

But as you mentioned, she made remarks in an interview with Bloomberg News over the weekend. This was kind of at the tail end of her meeting with G7 leaders from around the world. And she was talking about the idea of higher interest rates being able to accommodate what would be a healthier economy. I want to read you the quotes so that you can kind of take it within full context. She said, quote, "If we ended up with a higher-- with a slightly higher interest rate environment, it would actually be a plus for society's point of view and the Fed's point of view."

Now, people might be looking at that quote and saying, OK, this might be a little bit alarming because I thought the Fed was going to hold pat on zero interest rates, at least maybe through the end of 2023. We know that they are a long ways away from their progress. So why is Janet Yellen, who by the way, is a former Fed Chair talking about the idea of higher interest rates? Well, I don't want to get too into the nitty gritty.

But the idea that Janet Yellen is trying to get at is that at some point over the longer run future of the economy, they can get to a healthy place where inflation is not necessarily at runaway levels. But it's not so low where the economy can't grow to a point where, yes, you can get back to a more quote unquote "normalized economy" where it could accommodate higher interest rates.

Now, you look at the Federal Reserve's projection of where that longer run rate would be. That's just normally called R-star. In an economic surplus, it's about 2.5% on a nominal basis. But of course, that's very low when you try to adjust for the Fed's target of inflation, about 2%. Which implies that the real neutral interest rate would be somewhere around 50 basis points. So not necessarily very high on that front.

So Janet Yellen saying if we can get the economy to a healthy place where it can accommodate higher levels of interest rates, that's a good thing. So not necessarily commenting on Fed policy, it seems like bond markets are reacting to that. You see a 1.58% [INAUDIBLE] or so on the 10 year. So it seems like people are kind of getting the message. But a little bit of complicated messaging at least from the Treasury Secretary, yes.

MYLES UDLAND: Yeah. And, Brian, I just wanted to pick up on that point. Specifically, I mean, look as Treasury Secretary, you're one of the most powerful people within the government. So, you know, Janet Yellen certainly free to say whatever she wants pretty much. But it sounded a lot like Central Bank speak. And I do think as you outlined, I mean, the messaging is a little bit complicated.

And, you know, I guess, who really cares about messaging if the market isn't reacting to it. But these are very Fed Chair like comments from someone who, you know, had been the Fed chair. Certainly follows Fed policy closely. But is now focused on a different set of government challenges.

BRIAN CHEUNG: Yeah. Well, and this is the big challenge for Janet Yellen. And again, she was formerly Fed Chair. She's spent basically her entire life in the academia world. And that makes it very difficult for someone who's in a completely different role on the fiscal policy side of things, where your audience is not necessarily economists on the-- you know, at these big banks sort of people who have been studying these types of things at the big saltwater or freshwater kind of houses there.

So I think the question is really going to be can she kind of communicate what she's trying to say in a way that isn't as econometric or kind of as in the weeds? And I think that she learned the hard way when markets did kind of flinch a little bit. This was a few weeks back when she had had an appearance, I believe, it was at the Atlantic, where she had made very similar remarks saying, higher interest rates could be a good for the economy. And then everyone said, well, is she trying to jawbone the Federal Reserve?

So what's interesting is that she's still kind of essentially saying the same thing here. But I think markets, I guess, now are kind of in tune with what she really means in this case. But, you know, she's very early on in this tenure in the Biden administration. We'll see if maybe there are other future episodes, where some of the Fed speak that she's trying to do at least from the Treasury building might end up getting people confused.

JULIE HYMAN: Yeah, and something else, you know, in this sort of era of heightened sensitivity to all of this inflation talk and rate talk, we've got the next CPI data point coming this week on Thursday, right. And the estimates I saw were for the headline number to rise 4.7% core, 3.4% on a year over year basis. But Brian, you know, you have to wonder if a lot of this is baked in at this point. And certainly, on a consumer level, people know prices are going up because they're paying that.

BRIAN CHEUNG: Yeah. And in our conversations with the Fed officials over the last few weeks, we're currently in a Fed blackout period ahead of-- not this Wednesday but next Wednesday's F1C meeting. But Fed officials have said we should expect to see higher prints on inflation. Although, we already had an upside surprise for the data for May and April, I think that you'll hear most Fed officials, including some, like, the likes of Rich Clarida say they were honestly surprised about the last round of that CPI print.

So if it is indeed the case that we're inching a little bit closer to that 4% year over year on the CPI, that would indeed definitely imply that the inflationary pressures are there. And no one's denying that. But of course, the Fed, for their cover at least, saying that this is likely to be transitory, this is likely to be temporary. Not just necessarily the base effects of looking at these year over year comparisons, where you're comparing against the depths of the pandemic but also some of these supply chain issues that have been choking up some of the, I guess, availability of materials that have forced these producers to ultimately raise their prices.

Now, where you fall on that. Are you team overheating or are you on team transitory depends on whether or not you think this is going to lead to some more cost push pressures, where ultimately wages are rising along with prices. That could lead to some sort of 1970s like price spiral. Some people saying this economy is very different. That's not going to happen this time. But that debate very much still ongoing. And I believe it's going to be more than just the May and even June print before people have a good clue of exactly what's going on here.

JULIE HYMAN: And this definitely is also going to be really interesting after comments last week from Caterpillar and GM that we were starting to see some of those supply chain pressures abate. But how long will it take to make its way through to prices and the consumer side? Probably a little while. Brian, thank you so much. Appreciate it.