WASHINGTON: US interest rates may need to rise “somewhat” to contain inflation if President Joe Biden’s latest spending proposals pass and the economy warms, Treasury Secretary Janet said Tuesday (May 4th) Yellen.
But after her comments sparked a mini firestorm and caused stock prices to plummet, Yellen later clarified that she neither predicted nor suggested that the Federal Reserve should hike rates.
After securing approval for a US $ 1.9 trillion pandemic bailout in March, Biden made two more proposals totaling nearly US $ 4 trillion over a decade and partially paid for with increases taxes on companies and the rich.
The goal is to reorganize the U.S. economy after the COVID-19 pandemic caused a severe slowdown in 2020.
“Interest rates may have to rise somewhat to ensure our economy does not overheat,” Yellen said in a pre-recorded conversation with The Atlantic.
However, she said that “the additional spending is relatively small compared to the size of the economy” and is over a longer period than the pandemic rescue spending, which has focused on the immediate needs of workers. and families.
Although Yellen acknowledged that higher growth “could lead to very modest increases in interest rates”, the United States needs the investments “to be competitive and productive.”
The Federal Reserve has pledged to keep interest rates close to zero until employment recovers and inflation stays above its target level of 2% for some time, but economists and investors are increasingly warning that government spending will spiral inflation.
Fed Chairman Jerome Powell and others have tried to allay those concerns, saying the near-term price increases were due to the rebound from the unprecedented impact of COVID-19, as well as problems supply with the resumption of economic activity.
‘RETURN TO THE TRACK’
Yellen, who was Powell’s predecessor as Fed chairman, agreed the price spikes would be temporary.
“I don’t think there will be an inflationary problem, but if there is, the Fed can be counted on to fix it,” she said at a conference hosted by The Wall Street Journal .
She stressed that she “respects the independence of the Fed” and would not suggest policy.
She was optimistic about the outlook, predicting that the United States would return to full employment next year.
“I think the economy will get back on track.”
In a bid to spur jobs and growth in the years to come, Biden proposed the US $ 2 trillion US Jobs Plan that would pay for upgrading roads and bridges while funding green technology, l expansion of broadband Internet access and repair of household water supply.
And his latest proposal is the US $ 1.8 trillion US plan for families, which would inject money into child care, preschool education, and colleges and universities.
In response to questions about the massive spending, Yellen said it was important that “government deficits remain low and manageable,” which is why the White House has proposed tax hikes to pay for investments, as well as a tightening tax collection to fill in the gaps.
“It is truly shocking and distressing to see estimates suggesting that the gap between what we collect in taxes under our tax laws and what we should collect if everyone paid the taxes owed is over $ 7 trillion over a decade, ”she said.
“We are trying to take meaningful steps to close this gap.”