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Treasury’s Yellen: Interest rates may need to rise modestly

By Ann Saphir and Dan Burns

(Reuters) -U.S. interest rates may need to rise to prevent the economy from overheating as more of U.S. President Joe Biden’s economic investment programs come on line and boost growth, U.S. Treasury Secretary Janet Yellen said in remarks released Tuesday.

“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 taped remarks to a virtual event put on 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 (and) I think that our economy will grow faster because of them.”

Some market participants pointed to the statement on interest rates by Yellen, a former head of the Federal Reserve, as an aggravating factor in the day’s sell-off in stocks. Longer-dated Treasury yields also ticked higher after her comments.

“She was actually asked about the growing share of government spending to GDP and she was asked a very economist question and she answered in a very economist way, where interest rates to yields might have to rise a little bit for the reallocation of resources and the market read that as rates will have to rise,” said Gennadiy Goldberg, interest rate strategist at TD Securities. “But I think they’ve already risen. They’ve gone from 1% to where we are now, so it’s certainly quite a bit already.”

“I don’t think it was meant to be an impactful statement that yields will have to rise now,” Goldberg said.

Indeed, Treasury bond yields have risen sharply this year, especially in the first quarter, as economists and investors ratcheted up their expectations for the U.S. economy’s recovery from the coronavirus pandemic and associated recession.

The yield on the benchmark 10-year Treasury note was 1.58% on Tuesday.

Federal Reserve officials, including Chair Jerome Powell, have said the move reflects confidence in the economy rather than expectations for the central bank to start dialing back its ultra-accommodative policy. Powell has said repeatedly the Fed is nowhere close to beginning that process.

Yellen said a main goal of Biden’s programs is to help reverse decades of widening economic inequality.

Overall the programs, which include stepped-up spending on infrastructure, childcare and education, will make a “big difference” to inequality, Yellen said.

Republicans have criticized the proposed tax increases Biden expects to use to pay for his proposals, but Yellen said the effect of a change in marginal tax rates is “much less powerful in influencing growth in either direction,” adding that her aim is to make sure government deficits “stay small and manageable.”

(Additional reporting by Karen Brettell in New York;Editing by Franklin Paul and Andrea Ricci)

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