Inflation Pushing Interest Rates Higher Would Be Good for US: Yellen

U.S. Treasury Secretary Janet Yellen speaks during a news conference, after attending the G7 finance ministers meeting, at Winfield House in London on June 5, 2021. Justin Tallis/Pool via Reuters

Treasury Secretary Janet Yellen says the trillions of dollars in President Joe Biden’s new spending proposals would be good for the United States, even if they push inflation higher and lead the Federal Reserve to raise interest rates.

“If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view,” Yellen said in a June 6 interview on Bloomberg.

As part of its crisis support measures for the economy, the Fed has kept interest rates at near-zero and has been making around $120 billion in monthly asset purchases.

Yellen made the remarks during her return from a G-7 finance ministers’ meeting in London, at which she reiterated her view that the current bout of inflation would be temporary.

“We’re seeing some inflation, but I don’t believe it’s permanent,” Yellen said at a June 5 press conference following the meeting.

She said the consensus view at Treasury is that the year-over-year inflation rate would continue through the rest of the year at “maybe around 3 percent.”

Treasury Secretary Janet Yellen speaks during a virtual event in Washington on Feb. 5, 2021. Drew Angerer/Getty Images

The Fed’s preferred inflation gauge, the so-called core personal consumption expenditures (PCE) price index—which excludes the volatile food and energy components—soared by 3.1 percent in the year to April, surging past the central bank’s recently revised 2 percent average target and hitting levels not seen in nearly 30 years.

The sharp rise in the PCE gauge follows an earlier rise in an alternative inflation measure known as the consumer price index (CPI), which increased by 4.2 percent for the 12 months ending in April—the largest 12-month increase since September 2008, when the index rose by 4.9 percent.

Fed officials have repeatedly said they believe the current bout of inflation is transitory and have expressed willingness to see inflation run hot in the short term to achieve their longer-run average target of 2 percent by continuing to buoy the recovering economy with low-interest rates and an aggressive bond-buying program.

The Federal Reserve Board building on Constitution Avenue in Washington on March 27, 2019. Brendan McDermid/Reuters

Some economists have warned, however, that inflation has now replaced high unemployment and deflationary pressures as the chief risk to the economy, while urging the central bank to begin signaling a possible policy shift toward tapering asset purchases and raising rates.

In her interview with Bloomberg, Yellen took a benign view of the current inflationary environment, saying that, over the longer term, disinflation has been policymakers’ main worry.

“We’ve been fighting inflation that’s too low and interest rates that are too low now for a decade,” Yellen said. “We want them to go back to” a normal interest rate environment, “and if this helps a little bit to alleviate things then that’s not a bad thing—that’s a good thing.”

Yellen added that Biden’s spending proposals would total around $400 billion per year and wouldn’t be a high enough level for inflation to stick around for long.

One likely consequence of higher rates would be a stronger dollar, which has been in a downward trend since March 2020, when the Fed dropped rates and launched its massive asset-buying program. Savers also benefit from higher interest rates, which discourage borrowing and incentivize saving.

Yellen’s comments come as Fed policymakers have begun to acknowledge they are closer to debating when to pull back some of their crisis support for the economy, even as they say it’s still needed to bolster the recovery and employment.

Fed officials have promised to give markets plenty of notice before changing policy, to avoid a repeat of the “taper tantrum” spike in bond yields after then-Fed Chairman Ben Bernanke surprised markets by flagging a reduction to the Fed’s bond-buying in 2013.