By Kate Davidson
WASHINGTON -- 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
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
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
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
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
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
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
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
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,
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.
--Alex Leary and Sam Goldfarb contributed to this article.
Write to Kate Davidson at email@example.com
(END) Dow Jones Newswires
May 04, 2021 18:58 ET (22:58 GMT)
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