By Kate Davidson 

WASHINGTON -- Treasury Secretary Janet Yellen said Tuesday that it is possible the Federal Reserve may have to raise interest rates to keep the economy from overheating if the Biden administration's spending plans are enacted.

President Biden has proposed roughly $4 trillion of new spending on infrastructure and social programs over the next decade, including funding for roads and bridges, research and development, affordable child care and paid family leave.

"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.

The remarks come amid recent signs that inflation is picking up. The Labor Department's consumer-price index jumped 2.6% in the year ended in March, compared with a 1.7% rise in February. The Fed's 2% inflation goal is linked to a different measure that tends to run a bit lower.

Fed Chairman Jerome Powell reiterated 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 be transitory.

Ms. Yellen, who previously served as chairwoman of the central bank, said Tuesday the administration's spending plans would involve some reallocation of resources within the economy, which "could cause some very modest interest increase in interest rates."

But she emphasized that the investments, such as worker training, free community college and more funding for research and development, are needed to make the U.S. economy competitive and more productive.

"I think that our economy will grow faster because of them," she added.

Asked whether President Biden agreed with Ms. Yellen's assessment, White House spokeswoman Jen Psaki told reporters Tuesday afternoon that the president certainly agrees with his Treasury secretary and that the White House is keeping a close eye on price pressures.

"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.

Write to Kate Davidson at


(END) Dow Jones Newswires

May 04, 2021 14:26 ET (18:26 GMT)

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