Fed may have to increase interest rates to keep lid on inflation: Yellen

European and US equity markets mostly fell Tuesday, with the Nasdaq slumping on valuation concerns after US Treasury Secretary Janet Yellen said interest rates could rise.

Yellen, in a pre-recorded conversation with The Atlantic, said US lending 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.

The remarks added to pressure on stocks, especially the tech-rich Nasdaq, which has prospered during the pandemic due to the Federal Reserve's policy of near-zero interest rates.

Investors have been fretting for weeks about the risk of higher inflation and a sudden shift in Federal Reserve policy.

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

Still, the Nasdaq finished down nearly two percent.

Earlier, major European indices all ended the day lower, with Frankfurt tumbling 2.5 percent as all stocks on the DAX 30 saw losses, the greatest of which were among industrial and tech companies.

How high?

Equities are sitting around record or multi-year highs after a more than year-long rally, and there is a feeling that they are in store for a small correction soon, before resuming their upward march.

"The peak growth headwind is blowing against the stock market and driving a period of consolidation after the tailwind of reopening optimism catalyzed a 5.2 percent gain for the SP 500 (and a 5.4 percent gain for the Nasdaq Composite) in April," said Patrick O'Hare at Briefing.com.

The flipside of the blockbuster earnings reported by many companies has been warnings about rising price.

"Wall Street won't find out if the Fed is making a policy mistake until several months down the road, and that is making some traders nervous," said Edward Moya at currency trading platform OANDA.

Meanwhile, oil prices extended Monday's rally ― hitting seven week highs ― with traders hopeful for a resumption of travel in the coming months.

"As more US states are easing pandemic-related lockdowns and some European countries are welcoming fully-vaccinated international travellers, the demand for crude oil is returning," said Evelyn Baker at TD Ameritrade. (AFP)