“‘The risk is that we’re going to hit the brakes very, very hard.’ ”
— Larry Summers
Almost a full year of monetary-policy tightening by the Federal Reserve appears to be having little impact on price pressures, putting policy makers in danger of needing to do much more, according to former U.S. Treasury Secretary Larry Summers.
A steady stream of data from January underscores just how resilient the U.S. economy — and, with it, inflation — remains, despite eight straight interest-rate hikes by the Fed since last March, which together have taken borrowing costs to their highest levels since 2007. Until recently, few could imagine that the U.S. would be able to withstand interest rates of close to 5% without tipping into a recession.
In an interview with Bloomberg Television, Summers said that “we clearly have an economy where demand is superstrong,” and there’s a “possibility that we’re not landing at a terminal rate sometime in the next several months.”
Friday’s financial-market action demonstrated that many traders and investors are in the process of revising their expectations, after previously thinking the Fed would deliver a few more quarter-percentage-point hikes before pausing and then cutting interest rates.
Yields on 2–
and 10-year Treasurys
ended the New York session on Friday with their fourth straight weekly advances, as fed funds futures traders factored in a growing chance of a half-percentage-point rate hike in March. The ICE U.S. Dollar Index
touched a six-week high, while U.S. stocks
finished mostly lower.
Summers’s views are widely followed of late because of his 2021 warnings about the then-growing risks of elevated inflation, which largely came to fruition. In January, the former Treasury secretary expressed doubt that the U.S. can return to a low-interest-rate environment.
“The Fed’s been trying to put the brakes on, and it doesn’t look like the brakes are getting much traction,” Summers said. “And when your brakes don’t get much traction, two things happen: You can be moving too fast, that’s the inflation pressure, and you can be setting yourself up for some kind of collision or crash down the road. And both of those things are real risks in this environment.”