(Bloomberg) — Former Treasury Secretary Lawrence Summers urged the Federal Reserve to refrain from signaling its next move after an expected interest-rate hike next week because of the economy’s highly uncertain outlook.
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“I don’t think it’s a time to be committing to rate hikes, given the indications of softness that we have seen from a number of quarters,” Summers told Bloomberg Television’s “Wall Street Week” with David Westin. At the same time, the possibility of rate increases shouldn’t be taken off the table, he said.
Inflation remains well above the Fed’s 2% target, with data on Friday showing the central bank’s preferred price gauge, which excludes food and energy, rose 4.4% in December from a year earlier. Evidence is mounting, however, that the economy is decelerating, with personal spending falling in December and overall consumption having slowed in the final quarter of 2022.
The Fed needs to “maintain maximum flexibility in an economy where things could go either either way,” said Summers, a Harvard University professor and paid contributor to Bloomberg Television. “They’re driving the vehicle on a very, very foggy night.”
One cause for concern for Chair Jerome Powell and his colleagues ought to be the optimism that’s reverberated across financial markets in recent months, Summers said.
“The monetary impulse that’s coming into the economy” is much less contractionary than indicated just by the Fed’s cumulative rate hikes, he said. Financial conditions “have moved substantially towards easing in the last several months,” and “that is something that I think needs to concern the Fed as it sets policy.”
As for the policy decision at the Fed’s Jan. 31-Feb. 1 meeting, Summers aligned with market pricing in expecting a 25 basis-point increase, which would take the federal funds rate target to a range of 4.5% to 4.75%.
Longer term, Summers said it’s likely that rates settle at a level higher than in the pre-pandemic period. Currently, Fed officials see a 2.5% federal funds rate over the long run, or 0.5% after accounting for a 2% inflation rate.
“I see more room for inflation to settle in a bit above 2, and I see more room for real rates to settle in above 0.5 than I do for the error to be in the other direction,” Summers said.
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