Summers Anticipates ‘Significant Likelihood’ Next Federal Reserve Action Will Involve an Increase

Likely Fed increase Summers anticipates significant action rise

Likely Fed increase: In a recent interview on Bloomberg Television’s Wall Street Week with David Westin, former Treasury Secretary Lawrence Summers expressed growing apprehension about persistent inflationary pressures, indicating a substantial likelihood that the Federal Reserve’s next move may involve increasing interest rates rather than lowering them.

Inflationary Concerns Surface

Summers emphasized the need for caution, stating, “There’s a meaningful chance — perhaps around 15% — that the next move is going to be upwards in rates, not downwards, with a likely Fed increase. The Fed is going to have to be very careful.” This cautious outlook comes in the wake of a week marked by higher-than-anticipated readings. Both consumer and producer price indexes for January showed significant increases.

“Summers underscores caution; a 15% chance of upward rate move amid rising inflation signals. Fed vigilance required,” according to Wall Street Journal Subscription.

Market Reassessments Follow Data Release

The latest data has led traders to reconsider their expectations and scale back bets on potential Federal Reserve rate cuts in the coming months. Of particular note is a key subset of services prices, which saw the most significant increase in nearly two years, according to data released earlier this week.

Summers’ Insights and Warnings

Summers currently holds a professorship at Harvard University. In addition, he receives compensation as a contributor to Bloomberg TV. He advised against over-interpreting the data. However, he acknowledged the potential for a paradigm shift. Contrary to economists’ expectations, housing costs have not emerged as a significant deflationary factor, especially when excluding rental units. Summers pointed out that the cost of owner-occupied houses does not suggest a deflationary scenario. He also mentioned that this factor could contribute to sustained price pressures throughout 2024.

Core Services Prices Drive Concerns

Summers highlighted another cause for concern: core services prices, excluding housing. These prices have surged due to increased wages. Describing the super-core measure as “explosive in January,” he expressed worries about the overall inflationary trend.

Assessment of Recent CPI Data

In January, the core Consumer Price Index (CPI) rose by 3.9% compared to the previous year, although it was lower than the 2022 peak of 6.6%. This level remains above what would align with the Fed’s 2% target based on a separate inflation gauge.

Questioning Economic Assumptions

Summers questioned the assumption that inflation would naturally decline to 2% in a stable, healthy economy, given the recent data. Regarding the prospect of Fed rate cuts, he dismissed the possibility for May, stating, “May is odds-off at this point. And probably should be odds-off.” Amidst looming uncertainties, market participants and analysts will vigilantly observe the changing economic panorama. They seek cues that could shed light on the Federal Reserve’s future policy decisions.

“Summers challenges inflation norms, doubts Fed cuts for May, advocates vigilance amid economic uncertainty,” according to Bloomberg.

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