Interest rates may have to rise if economy heats up: Yellen

— U.S. interest rates may have to increase “somewhat” to keep a lid on inflation if President Joe Biden’s latest spending proposals are enacted and the economy heats up, Treasury Secretary Janet Yellen said Tuesday.

But after her comments set off a mini-firestorm and sent stock prices tumbling, Yellen later clarified that she was not predicting nor suggesting the Federal Reserve should raise rates.

After winning approval for a $1.9 trillion pandemic rescue plan in March, Bidewn has made two more proposals totaling nearly $4 trillion over a decade and partially paid for with tax increases on corporations and the wealthy.

The goal is to revamp the U.S. economy after the COVID-19 pandemic caused a severe downturn in 2020.

“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat,” Yellen said in a pre-recorded conversation with The Atlantic.

However, she said “the additional spending is relatively small relative to the size of the economy” and is over a larger time frame than the pandemic rescue spending, which focused on immediate needs of workers and families.

Though Yellen acknowledged the higher growth “could cause some very modest increases in interest rates,” the United States needs the investments “to be competitive and to be productive.”

Stock markets are expected to experience a “technical correction” with investors focusing on “profit-taking” after U.S. Treasury Secretary Janet Yellen said rate hikes may be needed to stop the U.S. economy from overheating.

“I would say investors could view Yellen’s rate hike warnings as a justification for profit-taking. Her remarks could trigger volatility in the stock markets as more debates regarding the timing and effect of U.S. rate hikes will come. And that, I believe, would result in the markets seeing some corrections,” a senior portfolio manager at IBK Investment &Securities said by telephone, Wednesday.

Yellen conceded that interest rates may have to rise to keep a lid on the burgeoning growth of the U.S. economy, brought on in part by trillions of dollars in government stimulus spending.

“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat,” Yellen said during an economic forum presented by The Atlantic, early Wednesday (KST). “Even though the additional spending is relatively small relative to the size of the economy, it could cause some very modest increases in interest rates.”

But a few hours after the remarks, the treasury secretary said in a different event that she doesn’t see any inflationary problems brewing. “If anybody appreciates the independence of the Fed, I think that person is me. I don’t think there’s going to be an inflationary problem. But if there is the Fed will be counted on to address them,” she said.

But given the growing inflationary worries amid the prolonged COVID-19 pandemic, economists and market analysts contacted by The Korea Times said there are chances the remarks could awaken idling anxiousness among investors to take profits.

“Tech and biotechnology stocks will be affected by Yellen’s remarks. But given the continued growth in terms of corporate earnings, the intensity of correction, if any, could be short-lived. Every decline could be an opportunity to buy blue-chip tech stocks as the economic growth momentum is still alive,” another portfolio manager at Meritz Securities said, adding he advised institutional investors to buy more tech stocks. He, however, said the timing of Yellen’s rate warnings wasn’t good for market sentiment as Korea had just lifted its 14-month ban on short-selling.

For foreign and institutional investors, tech stocks are the top picks, with Baring and Nomura still thinking major tech stocks have been underpriced. South Korea is home to the world’s top two memory chip manufacturers — Samsung Electronics and SK hynix - as well as LG Chem, Samsung SDI and SK Innovation, which are the top battery suppliers for electric vehicles.

“Big investors renewed their interest in the Korean equity markets focusing on these growth stocks,” he added. “Yellen’s remarks may weaken overall stock market sentiment and tech stocks will be the primary targets for investors hoping to take profits.”

The S&P Index retreated 28 points to 4,164.66, while the techheavy Nasdaq index dropped 1.88 percent to 13,633.50, the largest decline for a single day of trading since March this year. Apple lost 3.5 percent, and Google’s parent company Alphabet declined 1.6 percent. Tesla and Facebook were down 1.7 percent and 1.3 percent, each. Intel retreated 3.3 percent.

South Korea, just like the United States, has already seen inflationary concerns arise thanks to massive stimulus spending and quite stable economic growth.

Minutes released by the central bank, Tuesday, that include details discussed in April’s monetary policy meeting, said some rate policy-setting members raised concerns over inflation. “The bank should consider applying ways to control inflationary sentiment,” one member was quoted as saying in the minutes. Yellen said she is largely not concerned about inflation becoming a problem.

“Any remarks from the central bank or financial authorities over inflation fears could additionally dampen investor sentiment in the stock markets,” the Meritz Securities manager said.

In line with the Federal Reserve’s move to keep its key rate near zero, the country’s central bank has been maintaining its “accommodative” monetary easing policy by leaving its benchmark rate unchanged at 0.5 percent.