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Federal spending could drive a rise in interest rates, Janet Yellen says

The Federal Reserve may need to increase interest rates in the wake of President Joe Biden's push for trillions of dollars in new spending on infrastructure, childcare and education, Treasury Secretary Janet Yellen said Tuesday. Yellen's remarks came as she continues to promote the president's recently unveiled $1.8 trillion American Families Plan and his more than $2 trillion American Jobs Plan. Both packages follow passage of a $1.9 trillion American Rescue Plan to combat the economic downturn from the coronavirus pandemic. 

"It may be that interest rates will have to rise somewhat to make sure that our economy doesn't overheat," Yellen said during a pre-recorded conversation for The Atlantic's Future Economy Summit. Yellen called the potential increases "very modest" and argued the spending would be "investments our economy needs to be competitive and to be productive."

Later on Tuesday, Yellen reiterated that she does not anticipate inflation will be a problem, calling potential increases in the coming months "transitory." 

But with several rounds of federal economic relief having already gone out, economists have raised concerns about inflation. Consumer prices have increased 2.6% over the 12 months ending in March, according to the Bureau of Labor Statistics. That's predominantly due to an increase in energy prices, which rose 13.2%, though food prices also rose 3.5%. 

Yellen, who previously served as chair of the Federal Reserve, clarified later Tuesday she was not making predictions or recommendations on interest rates, saying if anybody "appreciates the independence of the Fed, I think that person is me." She said the Federal Reserve could be counted on to do what is necessary. 

The Federal Reserve announced last week it would not raise interest rates, calling price increases temporarily. Officials at the central bank continue to seek inflation at 2% over the long term.  

"Of course officials who don't work here, in the Federal Reserve and other places, closely watch what needs to happen. I'm not going to speak on interest rates, but we also take inflationary risks incredibly seriously, and our economic experts have conveyed that they think this would be temporary and the benefits far outweigh the concern." said White House press secretary Jen Psaki when asked at her daily briefing about Yellen's earlier comments. 

The previous administration faced criticism after President Donald Trump attempted to pressure Federal Reserve Chairman Jerome Powell over interest rates. The White House pushed back Tuesday, claiming Yellen understands the independence of the Federal Reserve and was simply answering a question.   

"I think the president certainly agrees with his Treasury Secretary," said White House press secretary Jen Psaki, noting inflation concerns are something they "watch closely" at the Treasury Department and the White House. 

Yellen is no longer at the Federal Reserve but a cabinet member, so "it isn't a decision she can or needs to make," said Bankrate senior economic analyst Mark Hamrick.

"Treasury Secretary Yellen and successor Chairman Jerome Powell do not sound as if they are singing from the same hymnal when it comes to the outlook for interest rates," said Hamrick. "It would seem to be that Yellen believes that more significant or sustained inflation is a higher risk than what Powell has essentially repeatedly pledged should be short-lived or 'transitory', one of his new favorite words."

The markets had taken a dip by Tuesday afternoon: The S&P 500 was down just over 42 points and the Dow dropped more than 100 points since the start of the day.

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