Treasury Secretary Janet Yellen acknowledged Tuesday that interest rates may have to rise to keep a cover for the booming growth of the US economy partly caused by trillions of dollars in government stimulus spending.
“Maybe interest rates should go up to make sure our economy doesn’t overheat. Although the additional spending is relatively small in relation to the size of the economy, it could cause some very modest increases in interest rates,” Yellen said during an economic forum presented by The Atlantic.
“This is not something I expect or recommend. If anyone appreciates the independence of the Fed, I think that person is me, and I note that the Federal Reserve can be counted on to do whatever is necessary to achieve its dual mandate goals,” Yellen told the CEO Summit in The Wall Street Journal.
The U.S. economy already has been on fire, with first-quarter GDP growth at 6.4%. Goldman Sachs recently said it anticipates the second quarter growing around 10.5%.
Since the Covid-19 pandemic broke in March 2020, Congress has allocated some $5.3 trillion in stimulus spending, resulting in a more than $3 trillion budget deficit in fiscal 2020 and a $1.7 trillion shortfall in the first half of fiscal 2021.
President Joe Biden 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,” Yellen said. “But we’ve gone for way too long on letting long-term problems fester in our economy.”
Yellen has said she is largely not concerned about inflation becoming a problem, though she has added that there are tools to address it should that happen. Fed Chairman Jerome Powell recently said that the primary tool to control inflation is through higher interest rates.
As for concerns about the large deficits the U.S. is running, Yellen said “we need to pay for some of the things that we’re doing” though the government still has “a reasonable amount of fiscal space.”