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


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Treasury Secretary Janet Yellen is among the country’s most experienced economic policy experts.

A veteran of the Clinton and Obama administrations, Yellen has long been characterized 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.

Now, as Treasury Secretary for President Joe Biden, she presides over a level of stimulus unseen since World War II  — and she is sounding suddenly hawkish, especially in her remarks which aired Tuesday that higher interest rates might be necessary to keep the economy from overheating.

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 Fed — which sets interest rates — operates independently of the administration, Yellen’s statement conflicts with the central bank’s own lower-for-longer outlook.

After roughly a year of virus-induced lockdowns and dire economic fallout, the US is expected to rebound 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.

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 “least irresponsible” fiscal policy of the last four decades and warned of stifling inflation.

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Yellen surprisingly lent some credence to those worries during an interview aired Tuesday. 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.

“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 chair said during The Atlantic’s Future Economy Summit. “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.”

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 blog post, adding the White House will keep an eye out for “any signs of unexpected price pressures.”

It’s not the first time Yellen’s hawkishness has butted heads with the administration’s ambitions. The Treasury Secretary indicated to …read more

Source:: Businessinsider – Politics


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