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Treasury Secretary Janet Yellen said interest rates may have to rise modestly to prevent the U.S. economy from overheating due to higher levels of government spending.

“It may be that interest rates will have to rise somewhat to make sure our economy doesn’t overheat,” Yellen said in an interview with the Atlantic recorded Monday that was broadcast on the web on Tuesday. “It could cause some very modest increases in interest rates.”

Stocks extended their losses on Tuesday and the dollar briefly touched session highs after Yellen’s remarks.

Yellen’s comments come amid a debate on whether President Joe Biden’s raft of proposed and enacted government spending could spur a surge in price pressures. Administration officials have consistently argued that there’s little concern about a damaging inflation acceleration, given the tools policy makers have to head off such an outcome.

“These are investments our economy needs to be competitive and to be productive, and I think our economy will grow faster because of them,” Yellen said.

The Biden administration has proposed additional spending packages totaling about $4 trillion on top of the $1.9 trillion it pumped into the economy beginning in March to combat the impact of the Covid-19 pandemic.

“This has a demand effect on the economy but really it’s going to have important supply effects on the economy,” Yellen said.

(Updates with full comments starting in second paragraph.)



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