““The risk is that we’re going to hit the brakes very, very hard.” ”
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 for January underscores just how resilient the U.S. economy and inflation remain, despite eight straight interest rate hikes by the Fed since last March that 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 super strong,” 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-of-a-percentage-point hikes before pausing and then cutting interest rates.
Rates on 1-month
TMUBMUSD01M,
through 1-year Treasury yields
TMUBMUSD01Y,
all moved higher Friday as fed funds futures traders factored in a growing chance of a half-percentage-point rise the fed funds rate in March. The ICE U.S. Dollar Index
DXY,
touched a six-week high, while all three major U.S. stock indexes
DJIA,
SPX,
moved lower in afternoon trading.
Summers’ views are widely followed because of his 2021 warnings about the growing risks of inflation which largely came to fruition. In January, the former Treasury secretary also said that he doubts the U.S. will 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.”
Credit: marketwatch.com