Former Treasury Secretary Lawrence Summers said it was too early to expect the Federal Reserve to resume the pace of interest rate hikes amid the release of comprehensive US inflation data.
Former Treasury Secretary Lawrence Summers said that while the inflation data is a broad reflection of US price pressures, it would soon argue for the Federal Reserve to again accelerate the pace of interest rate hikes next month.
"The Fed has to look at the situation with a lot of humility," Summers told Bloomberg Television's "Wall Street Week" with David Westin. "It should refrain from walling itself off with any kind of hard declarations," he added.
On the one hand, "the Fed is trying to apply the brakes," Summers said, "and it doesn't look like the brakes are gaining much traction." But on the other hand, the economy is likely to come to a sudden stop when companies run out of inventory. construction and headcount on their payrolls, and consumers exhaust their savings.
"There are more possibilities open at this point," said Summers, a Harvard University professor and paid contributor to Bloomberg Television. The economy turns downward – producing a "dangerous drop-off", he said.
Days after Summers' January Consumer Price Index report showed an acceleration in price pressures, the headline gauge rose 0.5% from the previous month, its most since October. The January jobs report also showed an increase in employment, with the number of job seekers far outnumbering the number of positions available.
The average component of consumer prices is now climbing at a pace of "closer to 7%," Summers calculated -- the fastest in four decades. "That has caused real concern about inflation."
Summers said the data cast doubt about the consensus in financial markets that the main issue now is how many more 25 basis-point hikes the Fed will raise rates before a "long pause" and steps toward easing.
Instead, it is likely that the Fed will take longer to reach its peak policy rate -- or it will need to pick up the pace of hikes -- he said. Interest-rate futures suggest Chair Jerome Powell and his allies will hike the key rate by a quarter-percentage point in March and May, and favor a final quarter-point move in June.
rate outlook
"This raises the possibility that we are not getting off the terminal rate over the next several months -- or we will have to go back to hitting the brakes harder by more than 25 basis points," Summers said.
The former Treasury chief said separately that the latest budget-deficit estimates released this week by the nonpartisan Congressional Budget Office were "worrying" in their own right, and that the right way up could be worse.
In the CBO figures: The budget deficit for 2023 is seen at $426 billion worse than last May's estimated $1.41 trillion. Debt held by the public is seen climbing to $46 trillion by 2033, accounting for 118% of GDP – the highest in US history.
"My guess is that the final debt trajectory could run well higher than that of the CBO," Summers said. He pointed to three factors: Summers said the agency's estimate for the Fed's policy rate is to settle at 2.5% without recession. CBO forecasts take existing policies as their baseline. Summers said estimates about defense spending could prove to be too low, with the increase in outlays likely to result in "considerable" increases. security threats. The CBO assumes that the 2017 tax cuts enacted by former President Donald Trump will expire in 2025 as currently scheduled. Summers said, "I'd be surprised if that's actually true." ends up climbing 30% over a decade instead of the 20% the CBO forecast.
"This in turn will put pressure on interest rates, which will put pressure on the deficit to rise – and so you get a little bit of a vicious cycle," he said. "I don't think this is an imminent emergency" that needs to be addressed this year.
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