Yellen will be pushing President Biden to move forward with his US$4 trillion spending plans even if they trigger inflation

United States (US) Treasury Secretary Janet Yellen is in favour of higher interest rates, even if they trigger inflation that persists into next year.

Speaking in an interview with Bloomberg News, Yellen advised that she will be pushing President Joe Biden to move forward with his $4-trillion spending plans even if they trigger inflation that persists into next year and higher interest rates.

“If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view,” Yellen told Bloomberg during her return from the Group of Seven Finance Ministers’ meeting in London.

The debate around inflation has intensified in recent months, between policymakers like Yellen, who argue that current price increases are being driven by transitory anomalies created by the pandemic such as supply chain bottlenecks and a surge in spending as economies reopen. Critics of this position say trillions in government aid could fuel a lasting spike in costs.

Biden’s spending packages not enough to cause an inflation over-run

Biden’s spending packages would add up to roughly US$400 billion in spending per year, Yellen explained, arguing that this is not enough to cause an inflation over-run. According to her, any “spurt” in prices resulting from the rescue package will fade away next year.

Yellen, the former Federal Reserve chair, stated that “we’ve been fighting inflation that’s too low and interest rates that are too low now for a decade,” adding that, “we want them to go back to” a normal interest rate environment. Continuing, Yellen made the point that, “and if this helps a little bit to alleviate things then that’s not a bad thing – that’s a good thing”.

Bloomberg reports that the headline measure of consumer prices rose 4.2 per cent in the 12 months through April, and the numbers for May are due to be published this Thursday. The Fed Reserve has committed to only begin scaling back the $120-billion monthly pace of its asset purchases after there’s “substantial further progress” on inflation and employment.

Fed Reserve not pulling back stimulus support

Chair Jerome Powell, who took the reins at America’s Central Bank from Yellen in 2018, has sought to convince investors that he’s not considering pulling back support for the economy any time soon. Powell and his colleagues have continued to project their key interest rate at near zero through 2023.

US job growth picked up in May – along with worker pay – and the unemployment rate fell to 5.8 per cent, according to a Labor Department report Friday (June 4).

“I will not give up on the next packages,” Yellen said.

“They’re not meant as stimulus, they’re meant as investments to address long-standing needs of our economy,” Yellen reported. G-7 finance ministers and central bankers held a phone call on May 28 in which the group pressed Yellen on her views on inflation, according to a Treasury official.

The group ultimately agreed with her assessment that price spikes through the year are likely to be transitory, said the official, who briefed reporters on condition of anonymity.

Yellen said that monetary policy makers can handle any potential rise in inflation if it sticks.