Larry Summers says the Fed and markets are too bullish on anti-inflation measures

Fed's Mary Daly favors gradual rate hikes and faster balance sheet moves

“My own view is that the Fed and the markets are still not recognizing what’s likely to be necessary,” Summers said on Bloomberg Television’s “Wall Street Week” with David Westin. “The market judgment and Fed’s judgment is that you can somehow contain this inflation without rates ever rising above 2.5% in terms of the fed funds rate.”

Previous Treasury Secretary Lawrence Summers said that even after the Federal Reserve’s new hawkish turn and after a selloff in Treasuries, both policy creators and investors are as yet underrating what will be needed to cut down inflation. Forecasts presented by Fed authorities last month projected the key federal funds rate target at 2.1% toward the end of 2024, beneath the since quite a while ago run gauge for the benchmark of 2.5%. Ten-year Treasury yields, interim, are well beneath 2% even after the current week’s selloff.

Summers, a Harvard University professor and paid contributor to Bloomberg, said that if inflation did come down without the Fed hiking its target rate past 2.5%, that would only be likely if the U.S. economy had proved unable to cope with tightening of a lesser scale.

“What we’re going to find out is what the vulnerability of the economy is to rate increases,” Summers said. “It may be, as some argue, that because of greater levels of debt, because asset prices are substantially inflated, the economy is more vulnerable than usual to rate increases or to quantitative tightening.”

Friday’s jobs report was “strong,” and showcased wage gains that are “consistent with accelerating inflation,” Summers also said. There is “no path” toward more moderate price increases without a cooler labor market, he said.

In alignment with interest-rate futures and an increasing number of economists, Summers interpreted the Fed as having signaled that there’s a “very real, and even likely” possibility of kicking off its rate hikes in March.

“The challenge for the Fed is that they’re likely to see some amount of fluctuation in financial markets and concern about growth before they see the declines in inflation that are substantial — then they’re going to have a very difficult set of decisions to make,” Summers said. “We’re heading into a very challenging period for the Fed in terms of executing a soft landing.”

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