Yellen Says She Isn’t Predicting Higher Interest Rates
Treasury Secretary Janet Yellen said Tuesday she is neither predicting nor recommending that the Federal Reserve raise interest rates as a result of President Biden’s spending plans, walking back her comments earlier in the day that rates might need to rise to keep the economy from overheating.
“I don’t think there’s going to be an inflationary problem, but if there is, the Fed can be counted on to address it,” Ms. Yellen, a former Fed chairwoman, said Tuesday at The Wall Street Journal’s CEO Council Summit.
Ms. Yellen suggested earlier Tuesday that the central bank might have to raise rates to keep the economy from overheating, if the Biden administration’s roughly $4 trillion spending plans are enacted.
Ms. Yellen’s remarks come as lawmakers debate the merits of the administration’s spending proposals, which many Republicans have said are too costly and risk stoking inflation. Consumer prices jumped 2.6% in the year ended in March, compared with a 1.7% rise in February. And long-term Treasury yields have risen on signs of economic strength and expectations that the Fed will have to raise rates sooner than officials have signaled.
“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,” she said in a prerecorded interview at the Atlantic’s Future Economy Summit.
Ms. Yellen told The Wall Street Journal that she expects any near-term increases in inflation will be temporary. She echoed remarks from Fed Chairman Jerome Powell last week that the central bank isn’t worried about a persistent rise in inflation and that he expects that price increases over the coming months will subside.
The U.S. economy is poised for a rapid recovery this year, as newly vaccinated Americans flush with hundreds of billions of dollars in federal stimulus money increase spending. Gross domestic product climbed at a 6.4% seasonally adjusted annual rate in the first quarter, bringing the U.S. economy within 1% of its pre-pandemic peak.
Despite an improving economic outlook, most Fed officials expected to maintain ultralow interest rates through 2023, according to projections submitted at their March policy meeting. Just seven of 18 policy makers anticipated lifting rates in 2022 or 2023.
Some economists, including former Treasury Secretary Larry Summers, have warned that a burst of federal spending this year stemming from the $1.9 trillion Covid-19 relief package enacted in March could prompt unwelcome inflation.
Ms. Yellen said she expects to see some price pressures over the next six months, largely because of supply-chain bottlenecks, higher energy prices and a near-term demand for workers, as normal economic activity resumes. But she said she disagreed with Mr. Summers that the relief package would overheat the economy.
“It’s something we’re watching very carefully, and there are tools to address it in the event that that occurs,” she said at the Journal summit. “But I really feel that this is necessary to make sure that the pandemic doesn’t result in permanent scarring of workers and families in our economy, that we’re able to get back on track quickly.”
She also played down concerns that Mr. Biden’s two new economic plans—one focused on infrastructure spending and another on families—would spur uncontrolled inflation. The spending, while large, would be spread out evenly over eight to 10 years, she said. The Biden administration has also proposed tax increases on corporations and the wealthy that officials say would pay for the plans over 15 years.
She emphasized that Mr. Biden’s proposed spending plans—such as on worker training, free community college and research and development—would help make the U.S. economy competitive and more productive.
Ms. Yellen’s remarks were unusual because White House officials typically refrain from commenting on monetary policy. Such was the norm for decades, starting in the Clinton administration, until President Trump began weighing in on the Fed’s actions and urging Mr. Powell to cut rates before the pandemic.
“If anybody appreciates the independence of the Fed, I think that person is me,” she told the Journal, adding that it is entirely up to the central bank how it manages monetary policy. “It’s not something I’m going to give opinions about.”
Stocks dipped after Ms. Yellen’s comments to the Atlantic, paring early declines, with the Dow Jones Industrial Average eventually posting a small gain. The yield on the benchmark 10-year U.S. Treasury note ended lower for a third consecutive session, settling at 1.591%, according to Tradeweb, down from 1.606% Monday. Yields on shorter-term Treasurys, which are especially sensitive to changes in monetary policy, were little changed—suggesting the remarks had little impact on investors’ interest-rate expectations.
Ms. Yellen’s message was that “rates may need to be slightly higher if the economy overheats. So I don’t think that was a major change from the outlook,” said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co.
Asked whether President Biden agreed with Ms. Yellen’s comments to The Atlantic, White House spokeswoman Jen Psaki told reporters Tuesday afternoon that the president certainly does.
“We also take inflationary risks incredibly seriously, and our economic experts have conveyed that they think this would be temporary and that the benefits far outweigh the concern,” she said.
In the Atlantic interview, Ms. Yellen appeared to be addressing the mechanics of interest rates and what she believed is likely to happen, not offering a critique of Fed policies, said Peter Conti-Brown, an assistant professor at the University of Pennsylvania’s Wharton School who has studied Fed independence. In that regard, her remarks weren’t unusual for a Treasury secretary, he added.
But her comments could rankle some Democrats who are at odds over whether the U.S. is close to a point when rising debt and concerns about inflation might prompt higher rates, he said.
“Secretary Yellen’s statement—even to acknowledge that threshold exists, or that it is looming—risks taking sides in a debate where she undoubtedly has strong views but that strategically the Biden administration may want to avoid,” Mr. Conti-Brown said.