Yellen, who previously served as Fed chair, expressed support for Biden’s spending programs but said the central bank may be required to hike interest rates to prevent the economy from growing 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.”
Congress has allocated about $5.3 trillion in stimulus spending since the start of the pandemic and Biden has pushed for an infrastructure plan including $4 trillion more in spending.
Yellen noted 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 left interest rates unchanged in the range of 0%-0.25% and said that it will continue monthly asset purchases of $80 billion in Treasury securities and $40 billion mortgage-backed securities to ensure the economy stays on track toward recovery.
Traders were spooked by Yellen’s comments as the Nasdaq Composite fell 1.88% in its worst day since March, the S&P 500 dropped 0.67% and the Dow Jones Industrial Average closed flat as it gained 19.80 points or 0.058%.
Tech stocks, in particular, struggled as Apple stock plummetted 3.54%, Tesla dropped 1.65%, Google‘s parent company Alphabet slid 1.55% and Facebook stock closed down 1.31%.