By Wolf Richter, editor of Wolf Street. Originally published at Wolf Street.
Starting in 2018, President Trump harangued and hammered Fed Chair Jerome Powell to end Quantitative Tightening and to cut interest rates, and Powell buckled and did his infamous “180.” And now suddenly – unless this gets walked backed again tomorrow – we’ve got the opposite. Treasury Secretary Janet Yellen said in an interview with Bloomberg News on Sunday that higher interest rates would “actually be a plus for society’s point of view and the Fed’s point of view.”
Under Fed Chair Yellen, the Fed hiked interest rates five times, starting in December 2015. Yellen departed in February 2018 as Trump had refused to reappoint her, and instead replaced her with Powell. At the time, the sixth rate-hike was already baked in for the March 2018 meeting. She is no stranger to rate hikes.
Now Yellen – presumably with the backing of President Biden – is supporting Powell on rate hikes, which is a dramatic shift from the prior administration.
The issue in the interview was inflation and whether or not it would be fired up further by the federal government’s $4 trillion additional spending spread over 10 years, adding $400 billion per year in extra spending.
Yellen said that this would not be enough for inflation to over-run. And she said that the current “spurt” in prices powered by the stimulus would fade next year – toeing the line that the biggest burst of inflation in three decades that blew through the Fed’s target by a big margin would just be “temporary.”
But, and here it comes: If the current burst of inflation turns out to be not temporary and triggers more persistent inflation, and thereby higher interest rates, it would be a good thing.
“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,” she told Bloomberg News.
“We’ve been fighting inflation that’s too low and interest rates that are too low now for a decade,” she said. “We want them to go back to” a normal interest rate environment, “and if this helps a little bit to alleviate things then that’s not a bad thing – that’s a good thing.”
“Alleviate things?” What things would be alleviated by higher interest rates? She didn’t say. Savers and government-bond investors earning a little bit of interest as to get some kind of cash flow going again so that they can spend a little more? People have been praying for this for years!
“I will not give up on the next [spending] packages,” Yellen said. “They’re not meant as stimulus, they’re meant as investments to address long-standing needs of our economy.”
If the temporary surge in inflation sticks and becomes persistent, monetary policy makers can handle it, she said. “I know that world – they’re very good,” she said. “I don’t believe they’re going to screw it up.”
Screw what up? Waiting too long with rate hikes and being too far behind the curve, only to have to crack down hard to get inflation back under control? She didn’t say what “screw it up” referred to. But there are endless options.
For Powell, this must surely be a breath of fresh air, to have the political backing for rate hikes and a “slightly higher interest rate environment,” as Yellen had put it.
Now the wait is on for Yellen to walk back her comments on Monday morning.