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Yellen Says Rates Might Need to Rise as Economy Recovers

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WASHINGTON – Treasury Secretary Janet L. Yellen said higher interest rates may be needed to prevent the economy from overheating as the Biden government proposes large investments to rebuild the country’s infrastructure and rebuild its workforce.

The comments, broadcast online on Tuesday at the Future Economy Summit of the Atlantic, came amid mounting concerns from some economists and corporations that the United States is in a period of higher inflation as stimulus money flows through the economy and consumers again Spend money.

The finance minister has no role in setting interest rate policy. That is the jurisdiction of the Federal Reserve, which is independent from the White House.

However, the words of Ms. Yellen, a former Fed chairperson, carry significant weight, and her comments have been picked up by investors and critics who have said she is unduly influencing her past monetary policy portfolio. In separate remarks later on Tuesday, Ms. Yellen made it clear that she respected the independence of the central bank and made no recommendation.

The stock market, which had declined in early trading, continued to decline following Ms. Yellen’s initial comments. Shortly before noon, the S&P 500 reached its worst level of the day with a minus of 1.5 percent. The stocks of some high-growth technology companies that are particularly sensitive to the risk of higher interest rates have been hit hard and the market has been negatively affected. But the blue-chip index halved those losses in the afternoon and only ended the trading day 0.7 percent.

Fed chairman Jerome H. Powell said last month that the central bank is unlikely to raise interest rates this year and that officials want another cure for the American economy, which they will consider getting their support through a slowdown in government-sponsored bond purchases and an increase in borrowing costs.

As the Fed watches for signs of inflation, Mr Powell and other Fed officials have stated that they believe price spikes will only be temporary. On Monday, John C. Williams, president of the Federal Reserve Bank of New York, said that while the economy recovers, “the dates and conditions we are seeing now are not nearly enough” for the Fed’s committee to make policy change its monetary policy stance. “

Ms. Yellen did not forecast a large rise in interest rates, which has been close to zero since March 2020. However, she said some “modest” increases may be needed as the economy recovers from the pandemic downturn and the administration tries to push infrastructure and infrastructure through other investments aimed at making the United States more competitive and productive.

“Interest rates may need to rise a bit to ensure our economy does not overheat, even though the additional spending is relatively small in relation to the size of the economy,” Ms Yellen said when asked if the economy could deal with the kind of robust spending the Biden government is proposing.

“I think they will make our economy grow faster,” Ms. Yellen said of the proposed investments such as research and development spending.

The Biden administration has proposed spending approximately $ 4 trillion over a decade and would pay for the plan with tax hikes for the corporate and wealthy.

Ms. Yellen’s comments on Tuesday met with criticism from those who believed she was pushing her limits by weighing monetary policy.

“Treasury ministers shouldn’t talk about the Fed’s policy rate, and Fed governors shouldn’t talk about US dollar policy,” Tony Fratto, former Treasury and White House official under the Bush administration, said on Twitter.

Francesco Bianchi, a Duke University economist who co-authored a 2019 research paper on the impact of former President Donald J. Trump’s tweets on perceptions of Fed independence, described Ms. Yellen’s comments as “unfortunate to the extent that the Fed is working hard to convince the markets that interest rates will stay low. “However, he did not believe that Ms. Yellen’s remarks were actually inappropriate.

“It is not clear that the comment qualifies as central bank interference, as Secretary Yellen described what she believed would happen if the economy recovered and the Biden government implemented its guidelines,” Bianchi said in an email . “In other words, it didn’t recommend that the Federal Reserve follow any particular policy recipe, but it seemed to be thinking about how interest rates in general behave when the economy improves.”

When asked about Ms. Yellen’s comments, White House press secretary Jen Psaki said the Treasury Secretary’s comment on interest rates was not trying to tell the Fed what to do or to undermine the independence of the central bank.

“Of all people, I would say Secretary Yellen certainly understands the independence and role of the Federal Reserve, and I think she just answered one question and conveyed how we balance the decision-making here,” said Ms. Psaki.

Ms. Yellen reiterated this assessment at an event hosted by the Wall Street Journal CEO Council on Tuesday afternoon. She said she was not prescribing a rate hike and rejected the idea that she would ever try to violate the Fed’s independence.

“Let me be clear, it’s not something I predict or recommend,” Ms. Yellen said of the interest rate hike. “If someone values ​​the independence of the Fed, I think I am that person.”

Matt Phillips contributed to the coverage.

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Robert Dunfee