“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat.”
Treasury Secretary Janet Yellen spooked Wall Street today with talk about interest rates.
Speaking virtually at The Atlantic’s Future Economy Summit, Yellen admitted a rate hike may be on the horizon soon to prevent the U.S. economy from getting too hot.
“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat,” she said. “Even though the additional spending is relatively small relative to the size of the economy, it could cause some very modest increases in interest rates.”
Those comments directly contradict the latest message from the Fed as the Central Bank maintains its plan to keep rates unchanged through 2023.
Despite her warning about an overheating economy, Yellen continued to defend the massive stimulus spending amid the pandemic saying, “these are investments our economy needs to be competitive and to be productive.”
Since the onset of the pandemic, Congress has spent $5.3 trillion on six stimulus packages. That spending pushed the federal deficit to a record $3.1 trillion in fiscal 2020.
And that extreme spending hasn’t slowed so far this year. In the first half of fiscal 2021, the deficit hit another record high at $1.7 trillion.
Now the Biden Administration is pushing for more spending with a pair of infrastructure proposals totaling more than $4 trillion.
While Yellen told The Atlantic there needs to be a focus on long-term fiscal responsibility in the U.S. she also defended the White House’s infrastructure plan.
She said the president is “taking a very ambitious approach, making up for really for over a decade of inadequate investment in infrastructure, in R&D, in people, in communities and small businesses, and it is an active approach. But we’ve gone for way too long on letting long-term problems fester in our economy.”
Although Yellen said she is largely not concerned about inflation at this point, she said the Fed has available tools to address the issue if it gets out of control.
And what’s the main tool the Central Bank uses against inflation? Rate hikes.
Even as Yellen and Jerome Powell downplay the inflation pressures, more and more experts are beginning to sound the alarm.
Over the weekend, Berkshire Hathaway Chairman Warren Buffett chimed in telling shareholders at their annual meeting, “We are seeing very substantial inflation. It’s very interesting. We are raising prices. People are raising prices to us and it’s being accepted… So it’s an economy really, it’s red hot. And we weren’t expecting it.”
Wall Street might get more guidance on future interest rate policy soon as two key Fed officials are set to speak on Wednesday.
Chicago Fed President Charles Evans will virtually address the Annual Hyman P. Minksy Conference Wednesday morning in a speech titled “A Promising Outlook and Thoughts on Inflation Dynamics.”