Treasury Secretary Janet Yellen said Tuesday the Federal Reserve may need to raise interest rates to prevent the economy from overheating, a notion that the central bank has resisted.
Yellen’s concession comes as President Joe Biden’s administration has been pumping money into the economy as part of an aggressive fiscal policy intended to pull the United States out of a pandemic-induced slump. Some economists have feared that the spending, coupled with the Fed’s ultra-low rates, could cause too-high inflation.
“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat,” Yellen said during an interview with the Atlantic that was released on Tuesday. “Even though the additional spending is relatively small relative to the size of the economy, it could cause some very modest increases in interest rates.”
“But these are investments our economy needs to be competitive and to be productive. I think our economy will grow faster because of them,” added Yellen, who was the chairwoman of the Fed from 2014 to 2018.
Yellen didn’t provide a timeline of when she thinks interest rates might need to be raised to combat the economy from overheating.
The economy has been beating expectations. U.S. gross domestic product grew at a 6.4% annualized rate in the first quarter of 2021, and the Federal Reserve Bank of Atlanta projected Tuesday that GDP growth for the second quarter will be even higher, at 13.6%.
Despite the positivity, the Fed, led by Chairman Jerome Powell, has bucked any proposed increases to interest rates and has suggested a hike from the near-zero levels might be years out. Powell has said that the U.S. is targeting 2% sustained inflation and full employment before changes are made.
The central bank predicts that inflation will breach that 2% threshold by the end of the year, although it projects that it will sink back down in 2022.
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