Yellen Says US Interest Rate May Rise, Prompts a Tech Sell-Off

05 May 2021 · 3rd Party Analysis

Yellen Says US Interest Rate May Rise, Prompts a Tech Sell-Off


In Summary

  • Treasury Secretary Yellen says higher rates could keep the economy from overheating
  • Later she backed off comments, saying near-term inflation could be temporary

Treasury Secretary Janet Yellen stated yesterday that the US may need to raise interest rates to prevent the economy from overheating. Her remarks on the US economy exacerbated a sell-off in technology stocks, the sector that is the most vulnerable to higher rates. The Nasdaq Composite finished Tuesday down almost 2%.

Investors were largely taken aback by the discordance in Janet Yellen’s suggestions and the repeated statements by Federal Reserve chief Jay Powell. Mr. Powell has indicated multiple times this year that the US will not be raising rates at least until 2023.

Speaking at a prerecorded virtual conference hosted by The Atlantic magazine, Treasury Secretary Janet Yellen discussed whether or not all the stimulus being pushed by the Biden administration was going to be sustainable for the US economy. “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 during her talk.

She went on to say that the increased spending 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.”

A Bright Outlook Ahead for the US

Her comments spooked the market, which has been anticipating a spike in inflation due to the rapid reopening and the quick economic recovery, boosted by federal spending. Moreover, investors were already relaxed that the Fed will allow the economy to run hot before raising rates and unwinding its monetary support. The Federal Reserve had signaled that any inflationary pressure would be only transitory.

Later in the day, Janet Yellen appeared in another interview, this time for the Wall Street Journal’s CEO Council. During her speech, she clarified her suggestions and to a certain extent walked back her comments, saying that higher interest rates were “not something I’m predicting or recommending”. She also added that, in her view, there would be no inflationary problem as the economy progresses.

“I don’t think there’s going to be an inflationary problem, but if there is, the Fed can be counted on to address it,” Ms. Yellen said. Her take on the economy during her second interview was more aligned with the approach of the Fed toward the economic outlook. Janet Yellen, a former Federal Reserve Chair, highlighted that if there are any near-term price increases, they will most likely be temporary. She echoed Fed Chair Powell’s comments made last week that the central bank does not see inflation rising significantly above Fed’s target, which stands at 2.4%.

The US economy is expected to go through its strongest recovery since the 1980s this year if Joe Biden’s push for an additional $4tn stimulus is approved. Adding to the brighter outlook, the President yesterday set a new vaccination goal. Mr. Biden will aim to ensure 70% of American adults have received at least one dose of the coronavirus vaccine by Independence Day on 4 July. Currently, more than half of the US adult population has received at least one shot of the vaccine, as per data from the CDC.

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