Former Treasury Secretary Lawrence Summers said Federal Reserve policymakers should highlight that a re-acceleration in interest-rate hikes is possible this month in the wake of a slew of robust economic data.
(Bloomberg) — Former Treasury Secretary Lawrence Summers said Federal Reserve policymakers should highlight that a re-acceleration in interest-rate hikes is possible this month in the wake of a slew of robust economic data.
“The Fed right now should have the door wide open to a 50 basis-point move in March,” Summers said on Bloomberg Television’s “Wall Street Week” with David Westin. “A reasonable assessment of where the Fed is would say that they have not been this far behind the curve for a year or so.”
Futures markets suggest only a small chance of a 50 basis-point move at the Fed’s March 21-22 policy meeting, with a 25 basis-point hike fully priced. Policymakers slowed their tempo of increases to a quarter point last month.
Fed Chair Jerome Powell “has an important opportunity” next week — when he will be testifying on the economy in congressional hearings — “to reset expectations and to address the growing credibility problems that the Fed has,” Summers said.
Powell and his colleagues need not bake in a half-percentage point move quite yet, said Summers, a Harvard University professor and paid contributor to Bloomberg Television. He said policymakers should look at next Friday’s February jobs report and the market reaction before deciding.
Six recent jolts have hurt the possibility of the soft landing that the Fed has sought, according to Summers:
- Seasonal revisions to the consumer price index that took the downward trend of inflation out of the data for the last several months of 2022.
- The CPI for January showed an acceleration in inflation.
- The personal consumption expenditures price index also picked up.
- January economic indicators “read strong.”
- Wage figures “no longer show the kind of reductions that we had been expecting.”
- The jump in Treasury yields, with 10-year rates climbing past 4%
Once again, “the arguments made by Team Transitory have unfortunately looked more like wishful thinking,” said Summers, who has also said in recent weeks that there’s a risk of a sudden economic slowdown.
“I’ve been very disappointed to see some of the speeches coming out of the Fed that have seemed to leave March off the table as a possible place for 50,” Summers said. “I hope the senior leadership of the Fed will guide to agnosticism on the possibility of a 50 basis-point move in March.”
Summers also criticized a push by progressive Democrats to shape President Joe Biden’s pick for the Fed vice chair position that’s now open. Massachusetts Senator Elizabeth Warren wants Biden to select a vice chair to counter Powell, who she said “has made clear that he will take extreme steps on interest rates and he’s willing to put millions of people out of work.”
Read More: Fed Becomes Progressives’ Punching Bag as Biden Weighs Next Pick
This campaign will prove counterproductive, because – in the short term “incumbents are going to want to look like they have not been pushed around,” and the Fed will want to demonstrate its independence in the face of any political pressure, Summers said. Over time, signs of “politicization” of the Fed could push up medium-term inflation expectations, sending longer-term yields and therefore mortgage rates higher, he said.
“This is really a very misguided and problematic strategy for progressives, even if one had their judgment that what’s most important is lower rates and to stimulate the economy,” he said. “So I hope they’ll back off this kind of public campaign.”
(Adds comment on progressives’ push on Fed appointment, in final three paragraphs.)
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