You kind of knew this was going to happen eventually. You’re just probably surprised it happened so fast and so publicly.
After serving as Federal Reserve chair for four years, until February 2018, and now Treasury Secretary since January, Janet Yellen could probably be forgiven for forgetting what position she holds. After all, in addition to being located in Washington, both the Fed and the Treasury pretty much work hand in hand, with the former directing monetary policy and the latter handling fiscal policy. Under the pretense, they’re both independent of each other.
But last week, Yellen let the cat out of the bag and ignited a one-day mini taper tantrum in stock prices, which is a little hard to understand, given that she only said what everyone else was already thinking. (But as we know, a gaffe is when a politician or government official accidentally tells the truth).
“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 [proposed and already enacted by the Biden Administration] is relatively small relative to the size of the economy,” she said in a prerecorded interview at the Atlantic’s Future Economy Summit.
Later on, of course, she walked that back a little, telling the Wall Street Journal, “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,” she said.
It was certainly much ado about nothing, but it raises an important question, namely: Other than raising interest rates, either directly or indirectly, what exactly can the Fed do to fend off higher inflation? Continue reading "Treasury Secretary Yellen's Gaffe"