Treasury Secretary Janet Yellen said on Tuesday that the Federal Reserve would need to lift interest rates in order to keep up with President Joe Biden’s budget plans.
Yellen, who previously served as Fed chair, voiced enthusiasm for Biden’s spending plans but said the central bank might be forced to hike interest rates to keep the economy from expanding too rapidly.
“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 during an economic seminar presented by The Atlantic. “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.”
Since the beginning of the pandemic, Congress has allocated almost $5.3 trillion in recovery funding, and Biden has advocated for an infrastructure package that includes a further $4 trillion in spending.
Yellen said that the president is “taking a very ambitious approach, making up 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.”
White House press secretary Jen Psaki said that Biden “certainly agrees with his Treasury secretary” on the potential need for higher interest rates and that the administration takes “inflationary risk incredibly seriously.”
Last week, the Fed held interest rates stable in the 0 percent to 0.25 percent range and announced that it would resume monthly bond purchases of $80 billion in Treasury securities and $40 billion in mortgage-backed securities to keep the economy on course for recovery.
Yellen’s remarks frightened traders, when the Nasdaq Composite plunged 1.88 percent in its worst day since March, the S&P 500 fell 0.67 percent, and the Dow Jones Industrial Average finished down, gaining 19.80 points or 0.058 percent.
Apple stock fell 3.54 percent, Tesla stock fell 1.65 percent, Alphabet, Google’s parent firm, fell 1.55 percent, and Facebook stock fell 1.31 percent.