Up the Rates
The former chair of the Federal Reserve and current U.S. Treasury Secretary Janet Yellen said President Joe Biden’s $4 trillion spending plan would benefit the country even if it increased interest rates.
During an interview with Bloomberg, Yellen said, “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…We’ve been fighting inflation that’s too low and interest rates that are too low now for a decade.”
Yellen’s comments left many investors anxious—If there’s anything that scares investors, it’s inflation and rising interest rates. On Saturday, Yellen said inflation could reach as high as 3% this year as the economy recovers from the pandemic-induced recession.
Higher inflation is typically seen as a negative for the stock market because it increases the cost of borrowing via higher interest rates, increases the cost of materials and labor, and generally reduces living standards. Moreover, inflation tends to lower profit growth forecasts, putting downward pressure on stock prices.
Despite the fear surrounding the impending inflation, Yellen believes it is “transitory.” She said, “production bottlenecks have caused elevated prices in some industries, such as motor vehicles, while other prices, such as airline fares, have rebounded back to more normal levels.”
It’ll be interesting to see how the markets react to Yellen’s comments this week—are you bullish or bearish?
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.