Larry Summers says the Fed and investors are ‘badly wrong’ on inflation’s path
Former Treasury Secretary Larry Summers on Monday took aim at the Federal Reserve’s strategy for defeating inflation, while also taking credit for predicting last year that markets and policymakers were overstating the likelihood of several interest-rate cuts in 2024.
At an event staged by the Council on Foreign Relations in Washington, Summers said that recent data indicating a slowdown in inflation are somewhat of a mirage caused by the normalization of prices following the pandemic — a trend that he said markets shouldn’t expect to continue.
See also: Fed’s Goolsbee lays out dovish case for rate cuts, flags ‘a couple of warning signs’ for economy
“Given the magnitude of our fiscal challenges … I think there’s a bit of excessive optimism about inflation,” Summers said, referring to a recent trend of record budget deficits that he believes will continue to support demand and put upward pressure on prices.
Summers added that the Fed is underestimating the long-term level of interest rates, known as the neutral rate, that will be necessary to keep prices from rising too quickly.
”My best guess is [the Fed] is badly wrong that the neutral interest rate is 2.5%,” he said. “My guess is that the neutral rate is 4.5%.” Fed officials raised their estimate of the neutral rate to 2.8% earlier this month.
The Fed’s benchmark interest rate is currently at 5.25% to 5.5%. According to Summers, that monetary policy is not very restrictive and investors shouldn’t expect interest rates to fall significantly from here.
Traders in the federal-funds futures market see a nearly 70% chance of more than one interest-rate cut before the end of 2025, according to the CME FedWatch Tool.
- https://www.msn.com/en-us/money/markets/larry-summers-says-the-fed-and-investors-are-badly-wrong-on-inflation-s-path/ar-BB1oOzof?ocid=00000000
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