US interest rates may have to increase “somewhat” to keep a lid on the economy if President Joe Biden’s latest spending proposals are enacted, Treasury Secretary Janet Yellen said on Tuesday.
However, Yellen said the proposed investments in infrastructure and families over the coming decade are needed to keep the United States competitive and boost growth.
After winning approval for a $1.9 trillion pandemic rescue plan in March, Biden has made two more proposals totally nearly $4 trillion over a decade and partially paid for with tax increases on corporations and the wealthy.
The goal is to revamp the US economy after the Covid-19 pandemic caused a severe downturn in 2020.
While those investments are over a longer term, “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat,” Yellen said in a pre-recorded conversation with The Atlantic.
However, “the additional spending is relatively small relative to the size of the economy.”
The Federal Reserve has pledged to keep interest rates near zero until employment recovers and inflation holds above its 2-percent target level for some time, but economists and investors are increasingly sounding the warning that government spending will cause an inflationary spiral.
Fed Chair Jerome Powell and others have tried to tamp down those concerns, saying price increases in the short term are due to the rebound from the unprecedented impact of Covid-19, as well as temporary supply issues as economic activity resumes.
Though Yellen acknowledged the possibility that the spending plans “could cause some very modest increases in interest rates,” she said “these are investments our economy needs to be competitive and to be productive.”
Biden proposed the $2 trillion American Jobs Plan that would pay for renovating roads and bridges while also funding green technology, expanding broadband internet access and fixing household water supplies.
His latest proposal is the $1.8 trillion American Families Plan, which would pour money into childcare, early education and colleges and universities.
Yellen said it is important that government “deficits stay small and manageable,” which is why the White House has proposed some tax hikes to pay for the investments, as well as tightening up on tax collection.
“It’s really shocking and distressing to see estimates suggesting that the gap between what we’re collecting in taxes under our tax law, and what we should be collecting if everybody were paying the taxes that are due, amounts to over $7 trillion over a decade,” she said.
“We’re trying to make meaningful steps to close that gap.”