Yellen Acknowledging that the Fed May have to Raise Rates

Yellen acknowledges that the Fed may have to act to avoid overheating.

US Treasury Secretary Janet Yellen admitted Tuesday that interest rates may have to rise to control the burgeoning growth of the US economy. The recovery is driven by trillions of dollars in government stimulus spending that could generate a boom in general and asset prices (bubbles).

The US economy is taking off like a rocket after the 2020 recession. Growth may outpace supply, generating inflationary tensions and problems for the economy. Therefore, a rate hike may be key to avoiding this scenario, even if the markets suffer a ‘tantrum’.

The objective is to prevent the economy from overheating, leading to an inflationary spiral with dire consequences for the economy and, above all, for the sectors most vulnerable to a strong price boom.

Avoid overheating
“It may be that interest rates have to go up a bit to make sure our economy doesn’t overheat,” Yellen said during an economic seminar.

“Although the additional spending is relatively small for the size of the economy, it could cause some very modest increases in interest rates.” However, Yellen has explained and qualified that “these are investments that our economy needs to be competitive and productive.”

The US government has spent billions on its recovery plans, which are still underway and still have plenty of ‘gasoline’. More aid for the unemployed, easier access to them, direct checks to families, historically low interest rates and trillion dollar purchases of bonds by the Fed are the cocktail that is reviving the economy, but at the same time it could become a trap. Sometimes a painful hangover can follow the high.