On Monday, former Treasury Secretary Larry Summers criticized the Federal Reserve’s plan to fight inflation. He also claimed credit for figuring out last year that markets and policymakers were exaggerating the chances of several interest rate cuts in 2024.
Summers said at a Council on Foreign Relations event in Washington that recent data showing a slowdown in inflation are more or less a mirage because prices have returned to normal after the pandemic. He also said that markets shouldn’t expect this trend to continue.
“Given how big our financial problems are…” Summers said, “I think there’s a bit of excessive optimism about inflation.” He was talking about the recent trend of record budget deficits, which he thinks will continue to boost demand and push prices up.
That’s not all, Summers said. He also said that the Fed is wrong about the long-term level of interest rates, called the “neutral rate,” that will be needed to keep prices from going up too quickly.
“I think [the Fed] is very wrong when they say that 2.5% is the neutral interest rate,” he said. “I think that 4.5% is the neutral rate.” Early this month, the Fed raised its estimate of the neutral rate to 2.8%.
The Fed’s main interest rate is between 5.25% and 5.5% right now. Summers says that the monetary policy is not very strict and that investors shouldn’t think that interest rates will drop a lot from here on out.
CME FedWatch Tool shows that traders in the federal-funds futures market think there will be more than one interest rate cut before the end of 2025. This chance is about 70%.
