Treasury Secretary says ‘modest’ rise in interest rates is needed to keep economy in check

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Janet Yellen said the economy is at risk of ‘overheating’ without interest rate increases

Treasury Secretary Janet Yellen said Tuesday that rising interest rates are crucial to keeping the economy from growing so fast that it “overheats.” The trillions of dollars in government stimulus spending have put the economy in somewhat of a precarious position, Yellen said. 

“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat,” Yellen said during an economic seminar presented by The Atlantic. “Even though the additional spending is relatively small relative to the size of the economy, it could cause some very modest increases in interest rates.”

“But these are investments our economy needs to be competitive and to be productive. I think our economy will grow faster because of them,” she said in the taped interview.

Large spending deficits

Stimulus spending has come to roughly $5.3 trillion since the start of the pandemic, and President Biden is pushing to allocate several trillion more to help consumers with things like child care, education, and paid leave from jobs. 

The level of spending over the past year or so has brought the nation's deficit to a record $3.1 trillion for the 2020 fiscal year and a high of $1.7 trillion for the first half of fiscal 2021. 

Yellen, who led the Federal Reserve from 2014-18, said the United States needs to focus on putting money toward mitigating certain government-centric problems that have become worse as a result of being ignored over the years. 

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,” Yellen said. “But we’ve gone for way too long on letting long-term problems fester in our economy.”

Yellen said higher interest rates would help “reallocate” economic resources.

“These are investments our economy needs to be competitive and to be productive,” she said.

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