Yellen Claims Higher Inflation and Interest Rates are Good for the Economy

Treasury Secretary defends Biden Administration’s large spending packages…
Fed officials begin talk about tapering asset purchases…
G-7 nations express support for global minimum corporate tax rate…

Treasury Secretary Janet Yellen claims higher inflation and higher interest rates would be good for the U.S. economy.

In an interview with Bloomberg, Yellen defended President Joe Biden’s plans to spend $4 trillion on traditional and so-called human infrastructure.

She admitted such a surge of spending would probably result in higher interest rates but claims that wouldn’t be so bad.

“If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view,” Yellen told Bloomberg.

She claimed the additional $400 billion in spending that would be added per year under Biden’s plans would not be enough to cause inflation to bubble over.

“We’ve been fighting inflation that’s too low and interest rates that are too low now for a decade… if this helps a little bit to alleviate things then that’s not a bad thing — that’s a good thing.”

Yellen Insists Current Inflation is Temporary

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The Treasury Secretary’s comments come as the latest data shows inflation running far above the Federal Reserve’s 2% target.

In April, the Core PCE Index rose 3.1% year-over-year while the Core CPI rose 3.0% annually.

Those rising inflation pressures have spooked the market in recent weeks that the Fed will taper its asset purchases and be forced to raise interest rates earlier than planned.

And in recent weeks, several Fed officials have seemed to be laying the groundwork to prepare the markets for talk about tightening monetary policy.

During a virtual event hosted by the Washington Post on May 21, Philadelphia Fed President Patrick Harker said, “It is something that, in my mind, we should start to have a conversation about sooner rather than later.”

Harker said the first step in tightening policy would be unwinding the $120 billion in monthly purchases of Treasury and mortgage-backed securities.

He said they would only begin looking at raising interest rates at the “appropriate time” if the economy continues to progress as planned.

Then on May 25, Fed Vice Chair Richard Clarida told Yahoo! Finance, “It may well be…there will come a time in upcoming meetings we will be at the point where we can begin to discuss scaling back the pace of asset purchases.”

A day later, Fed Vice Chair Randal Quarles continued to talk about tapering in a speech at the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution.

Quarles told the group, “If my expectations about economic growth, employment, and inflation over the coming months are borne out . . . and especially if they come in stronger than I expect . . . it will become important for the [Federal Open Market Committee] to begin discussing our plans to adjust the pace of asset purchases at upcoming meetings.”

And on May 27, Dallas Fed President Robert Kaplan — who has been talking about tapering for much longer than his counterparts — reiterated his previous calls to begin slowing down QE.

Kaplan told CNBC, “I think it would be wise sooner rather than later to begin gently taking our foot off the accelerator so we can avoid having to apply the brakes down the road.”

He particularly raised issues with the Fed’s purchases of mortgage-backed securities as the housing market continues to see surging prices.

“It’s my own view that at this stage, as opposed to a year ago, these mortgage purchases for example might be having some unintended consequences and side-effects that I think we need to weigh against the efficacy,” said Kaplan.

The hot rate of inflation has been blamed in part on base effects between 2020 and now, but also the surge in federal spending amid the pandemic.

But Yellen defended the president’s call for even more government spending saying, “I will not give up on the next packages. They’re not meant as stimulus, they’re meant as investments to address long-standing needs of our economy.”

G-7 Nations Support Global Minimum Corporate Tax Rate

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Yellen has received backing from G-7 nations for one of the Biden Administration’s top priorities during her trip.

In a video posted on Twitter, U.K. Finance Minister Rishi Sunak said, “G-7 finance ministers today, after years of discussions, have reached a historic agreement to reform the global tax system, to make it fit for the global digital age — and crucially to make sure that it’s fair so that the right companies pay the right tax in the right places.”

That announcement came after Yellen met with Sunak in London ahead of the G-7 Summit in the U.K. this weekend.

In a statement, the G-7 finance ministers said, “We commit to reaching an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises.”

Yellen also confirmed the news in a series of tweets saying, “The G7 Finance Ministers have made a significant, unprecedented commitment today that provides tremendous momentum towards achieving a robust global minimum tax at a rate of at least 15%.”

The Treasury Secretary began pushing for the global minimum tax rate in early April as a way to even the playing field between the U.S. and other trading partners.

The Biden Administration has used the plan to justify its calls to raise the corporate tax rate in the U.S. to 28%, saying a global minimum would prevent companies from taking jobs out of the country.