Former Treasury Secretary Lawrence Summers said that the odds are now almost even that the Federal Reserve will have to raise its benchmark interest rate to 6% or more to bring inflation back down to its 2% target.
(Bloomberg) — Former Treasury Secretary Lawrence Summers said that the odds are now almost even that the Federal Reserve will have to raise its benchmark interest rate to 6% or more to bring inflation back down to its 2% target.
“My guess now is that it’s nearly 50-50 that we’re going to get to — and need to get to — 6% fed funds, or above,” Summers said on Bloomberg Television’s “Wall Street Week” with David Westin.
Summers spoke shortly after the February US employment report showed a stronger-than-expected gain in payrolls, though the unemployment rate rose as more people came into the workforce. Average hourly earnings also slowed.
Read More: US Payrolls Top Estimates, Wages Cool in Mixed Signal for Fed
He said the mixed figures made it a “difficult” release to interpret, but the broader picture shows that the Fed’s current settings for rates “aren’t enough to really apply a lot of restraint.”
“Right now, it looks like the economy is strong for the near term — and that’s a very good thing, but it points to risks of inflation or a hard landing down the road,” said Summers, a Harvard University professor and paid contributor to Bloomberg Television. “So I think we’re still going above the speed limit.”
Supporting Powell
Summers applauded Fed Chair Jerome Powell’s opening of the door to a 50 basis-point move at the March 21-22 policy meeting, in his congressional testimony this week. Some Fed watchers criticized that move as undermining Fed credibility, by calling into question the wisdom of having slowed to a 25 basis-point pace in the last meeting, but Summers disagreed.
“I personally don’t think it’s a mistake in this moment for the Fed to put some credibility in the bank by really trying to be as up-to-date and with-the-curve on inflation as they can be,” he said.
The Fed can form its “best assessment” for this month’s policy decision after reviewing next week’s consumer price index report for February, he noted.
As for where the Fed ends up taking the federal funds rate target, Summers said that if Powell is committed to the 2% inflation target, as the chair has repeatedly emphasized, then “you’re likely to need to see further rate increases from here, on a meaningful scale, and that would take you up at least close to the 6% range.”
Budget Woes
Meantime, Summers also cautioned about the need for Washington to come to grips with a stark fiscal outlook, given projections for the highest debt burden the country has ever seen.
“I do think we’re reaching a point now where — given interest rates and given upwards pressure on interest rates, questions of debt and the deficit are going to be looming much larger,” he said.
While the Biden administration’s budget proposal, released this week, contains “some good proposals,” and moves to raise revenues and contain healthcare costs, Summers said it underestimates the cost of federal borrowing over time.
Read More: Biden Budget Illustrates Deficit Crunch Facing Washington
“The Biden administration budget predicts that interest rates will be 2.5% through most of the 2020s,” he said. “Maybe that’s what will materialize, but my guess would be that interest rates will be considerably higher, and that will cause more rapid debt increases.”
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