Yellen: It may be that rates will have to rise somewhat

Treasury Secretary Janet Yellen comments on risks of economic overheating. Yahoo Finance's Brian Cheung shares the details.

Video Transcript

ZACK GUZMAN: Welcome back. We are seeing today's sell-off accelerate a bit here with the NASDAQ off more than 2 and 1/2% after Treasury Secretary Janet Yellen not necessarily playing her part to assuage that sell-off, saying it might be time to potentially see rates go higher to protect against overheating the economy. I want to get to Yahoo Finance's Brian Cheung here, who has the latest from her. Brian?

BRIAN CHEUNG: Well, zack, these remarks coming about 20 minutes ago. And just for clarification, she's not saying necessarily that the Federal Reserve needs to get hiking interest rates immediately, just merely that at some point in time, they're going to have to do that to, what she described as reallocating certain resources in the economy.

So let's walk it back a little bit. Here were the exact words that she used, which haven't helped markets through the sell-off this morning. She said, quote, "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 is relatively small relative to the size of the economy," end quote. Again, this happening at an event held by The Atlantic this morning.

But the question is going to be why would interest rates need to rise? Well, keep in mind that the Biden administration has been aggressively spending, obviously that third round of stimulus, which was one of the first actions from the administration at the beginning of this year. But then we also have that multitrillion dollar infrastructure bill, which the administration is trying to push forward right now, right? Things like research and development, child care, other types of measures on that front.

And Yellen is saying that interest rates may have to rise to offset the stimulus that would be coming from that infrastructure bill. If you have another few trillion dollars of money going into the economy, then there needs to be something to offset that so that you can make sure that you can manage the economy, if otherwise easy money with the combination of that aggressive stimulus could result in that overheating, which is, I think, the crux of what Yellen is trying to say.

Now, of course, this puts the Federal Reserve in a bit of a precarious position because we've heard from her kind of counterpart on the central bank side of things-- that's Jerome Powell-- saying, as recently as last Wednesday, that the Federal Reserve is a long way from even thinking about raising interest rates. So, a very interesting conversation, I'm sure, that might be had maybe even as soon as today between Jerome Powell and his own predecessor, Janet Yellen. Because keep in mind, she was the head of the Federal Reserve before he was. So, very interesting dynamic playing out on the fiscal and monetary policy side of things, guys.

EMILY MCCORMICK: Definitely a dynamic to keep an eye on. But thank you so much, Yahoo Finance's Brian Cheung.