Treasury secretary suggests Biden’s plans may require interest rate hikes

Spending could cause economy to expand too fast, Yellen says

WASHINGTON — Treasury Secretary Janet Yellen said the economy could be at risk of overheating if the Biden administration’s spending proposals are approved, raising the prospect that the Federal Reserve could have to raise interest rates to address future inflation.

Her comments, which aired Tuesday and briefly spooked investors, reignited fears raised by some economists and business leaders that trillions of dollars in new spending that the government has authorized since March 2020 could lead the Federal Reserve to take steps that cool off the economy.

In an interview with The Atlantic, Yellen defended the Biden administration’s proposed spending programs but said that if approved they may require the central bank to raise interest rates to prevent the economy from expanding too rapidly. The Federal Reserve — not the Treasury Department — sets interest rate policy, but Yellen has a unique vantage point, having led the Fed at the end of the Obama administration and beginning of the Trump administration. Raising interest rates slows the pace of economic growth by increasing the cost of borrowing.

“It may be that interest rates will have to rise somewhat to make sure our economy does not overheat, even though the additional spending is relatively small relative to the size of the economy,” Yellen said. “It could cause some very modest increases in interest rates to get that reallocation, but these are investments our economy needs to be competitive and to be productive.”

The Biden administration has not suggested that it is rethinking any of its spending plans in the face of inflationary price pressures. And there are a number of factors that appear to be driving prices higher in certain sectors. Some of them have nothing to do with the government’s spending.

For example, the sudden restart of the U.S. economy and continued problems in global supply chains have led to a shortage on a range of items, from computer chips to rental cars , and prices have risen sharply.

Yellen’s remarks created further pressure on the S&P 500, which added to its losses for the day before recovering. The tech-heavy Nasdaq ended up down more than 2%.

Yellen’s comments were the most forward-leaning by a senior White House official on the issue of inflation, although the administration did not try to instantly distance itself from the treasury secretary.

“We take inflationary risk incredibly seriously,” White House spokeswoman Jen Psaki said.

Yellen’s comments suggest that the Biden administration could look to the Federal Reserve, which Yellen once led, to cool down the economy if their agenda is completely adopted by Congress.