ECONOMY

Yellen says rates may have to rise to prevent ‘overheating’

US Treasury secretary Janet Yellen warned on Tuesday that interest rates may need to rise to keep the US economy from overheating, comments that exacerbated a sell-off in technology stocks.

The former Federal Reserve chair made the remarks in the context of the Biden administration’s plans for $4tn of infrastructure and welfare spending, on top of several rounds of economic stimulus due to the pandemic.

“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 at an event hosted by The Atlantic magazine.

“So 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.”

Investors and economists have been in heated debate as to whether the trillions of dollars of extra federal spending will cause a jolt of inflation, as well as whether stimulus cheques already sent to consumers are contributing to a market rally that has taken equities to record levels.

Jay Powell, the current Fed chair, has said that he believes that inflation would only be “transitory” and the central bank has promised to stick firmly to an ultra-loose monetary policy until substantially more progress has been made in the economic recovery.

The possibility that interest rates could rise, reducing the appeal of owning shares in high-growth companies, has been a risk flagged by many investors since Joe Biden’s US presidential victory, even as markets have continued rising.

Yellen’s comments added extra pressure to shares of high-growth companies, which had already dropped sharply early in Tuesday’s trading session. The tech-heavy Nasdaq Composite was down 2.8 per cent at noon in New York, while the benchmark S&P 500 was 1.4 per cent lower.

Market interest rates, however, were little changed after the remarks, with the yield on the 10-year Treasury at 1.59 per cent.

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