Summers says too soon to call for March 50 basis-point Fed hike

“The Fed is going to have to view the situation with a lot of humility” at this point, Summers told Bloomberg Television’s “Wall Street Week” with David Westin. It should “avoid locking itself in with any kind of strong pronouncements,” he said.

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On the one hand, “the Fed’s been trying to put the brakes on, and it doesn’t look like the brakes are getting much traction,” Summers said. But on the other, there’s the potential for a sudden stop in the economy, when companies reckon with a build-up of inventories and headcount on their payrolls, and consumers deplete their savings.

“There are more possibilities open at this point,” said Summers, a Harvard University professor and paid contributor to Bloomberg Television. “The risk is that we’re going to hit the brakes very, very hard,” and that could happen just as the economy turns down — producing a “dangerous drop-off,” he said.

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Summers spoke days after the January consumer price index report showed a pickup in price pressures, with the headline gauge rising 0.5% from the month before, the most since October. The January jobs report also showed a surge in employment, leaving the number of job seekers still far below the number of available positions.

The median component of consumer prices is now climbing at a pace “close to 7%,” Summers calculated — the fastest in four decades. “That has got to cause real concern about inflation.”

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The data raise doubts about the consensus in financial markets that the main issue now is about how many more 25 basis-point hikes the Fed will execute before a “long pause” in rates and an eventual move toward easing, Summers said.

Instead, chances are the Fed will take longer to get to its peak policy rate — or that it will need to pick up the pace of hikes — he said. Interest-rate futures suggest Chair Jerome Powell and his colleagues will hoist the key rate by a quarter percentage point in March and May, and odds favoring a final quarter-point move in June.

Rate Outlook

“It raises the possibility that we’re not landing at a terminal rate sometime in the next several months — or that we’re going to have to go back to hitting the brakes harder by more than 25 basis points,” Summers said.

The former Treasury chief separately said that the latest budget-deficit projections released this week by the nonpartisan Congressional Budget Office were “concerning” on their own, and that the true path might be even worse.

Among the CBO’s figures: the budget deficit for 2023 is seen $426 billion worse than projected last May, at $1.41 trillion. Debt held by the public is seen climbing to $46 trillion by 2033, amounting to 118% of GDP — the highest in US history.

“My guess is that the ultimate debt trajectory may well run higher than CBO is saying,” Summers said. He pointed to three factors: Summers said the agency’s projection for the Fed’s policy rate to settle at 2.5% without there having been a recession leaves “much more room” to be “too low than to be too high.” CBO forecasts take existing policies as their baseline. Summers said that the assumptions about defense spending may prove too low, with outlays likely to increase “significantly” due to escalating security threats. The CBO assumes that the 2017 tax cuts enacted by former President Donald Trump will expire as currently scheduled in 2025. “I’d be surprised if that’s actually true,” Summers said. Summers said the debt-to-gross domestic product ratio could “easily” end up climbing by 30% over a decade, rather than the 20% that the CBO forecasts.

“That in turn will put pressure on interest rates, which will put pressure on the increase the deficit — and so you get a little bit of a vicious cycle,” he said. That will need to be addressed he said, while also saying, “I don’t think this is an imminent emergency” that must be addressed this year.

This story has been published from a wire agency feed without modifications to the text.