Former Treasury Secretary Lawrence Summers warned that complacency is setting into financial markets about inflation, and that the Federal Reserve may need to tighten further than what investors are currently expecting.
“We’re headed into what’s likely to be a turbulent period,” Summers told Bloomberg Television’s “Wall Street Week” with David Westin. “I’m not sure we’re on a trajectory that’s going to get us to 2% inflation without more interest-rate increases than the market is now anticipating.”
Summers cautioned that a number of factors that had been helping pull inflation down may reverse. One sign of that dynamic came from used-car prices, which climbed 2.5% last month — the most since the end of 2021, according to an industry report on Tuesday. Gasoline prices have also risen this year.
“There are a variety of bounce-back factors that we’re going to have,” said Summers, a Harvard University professor and paid contributor to Bloomberg Television. For overall inflation, “the gains in terms of further reduction are going to come hard” going forward, he said.
He also worried that rallies in financial markets in recent months have left conditions looser than they ought to be given the amount of Fed tightening still to come, the still-high rate of inflation and the continuing strength in the job market. Futures contracts suggest traders see two more quarter-point interest-rate hikes, bringing the Fed’s benchmark to about 5.2%.
The risk is “this tightening cycle is not just about one more, two more, three more 25 basis-point increases, but something more fundamental,” Summers warned.
The consumer price index rose 6.5% in the year to December, well down from the peak gain of 9.1% in June. Next week, the government will release the January CPI, which economists expect to have climbed 6.2% on a year-on-year basis. The monthly gain is seen at 0.5%, still above the kind of pace consistent with 2% inflation.
“Consensus has become substantially too complacent about inflation,” Summers said. The rate of price increase is still “at levels that would have been unimaginable for inflation two years ago,” he said.
He also voiced confidence in the Fed’s recognition that the job isn’t yet done and that the outlook is substantially uncertain. Policymakers are “determined to do what is necessary,” he said.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
Read more articles by Christopher Anstey
