(Bloomberg) — Former Treasury Secretary Lawrence Summers warned that complacency is setting in financial markets about inflation, and that the Federal Reserve may need to tighten more than investors currently expect.
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“We are heading into a turbulent period,” Summers told Bloomberg Television’s “Wall Street Week” with David Westin. “I’m not sure we’re on a trajectory that gives us the 2% inflation the market is expecting without an interest rate hike.”
Summers cautioned that many of the factors that helped bring down inflation could 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 Tuesday. Petrol prices have also increased this year.
“We have a variety of bounce-back factors,” 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 be difficult”, he said.
They also expressed concern that rallies in financial markets in recent months have left conditions loose, given Fed tightening is still to come, inflation still high and continued strength in the job market. . Futures contracts suggest traders see two more quarter-point interest rate hikes to bring the Fed’s benchmark down to around 5.2%.
The risk is “this tightening cycle is not just about another, two more, three more 25 basis-point increases, but something more fundamental,” Summers warned.
The Consumer Price Index rose 6.5% in December, well below the peak gain of 9.1% in June. Next week, the government will release the January CPI, which economists expect to climb 6.2% on a year-on-year basis. The monthly gain is seen at 0.5%, which is still well above the pace corresponding to 2% inflation.
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“The general consensus about inflation has become quite complacent,” Summers said. The rate of price rise is still “at levels that would have been unimaginable for inflation two years ago,” he said.
He also expressed confidence in the Fed’s recognition that the work is not yet done and the outlook remains largely uncertain. He said policymakers are “determined to do what is necessary”.
Separately, Summers applauded Joe Biden’s focus in his State of the Union speech on the economic health of the middle class — “bottom up and middle out,” as the president puts it.
But the former Treasury chief, who also served as head of the National Economic Council in the Obama administration, expressed concern about calls to “buy American.”
biden plan
Biden announced in his Tuesday address that “there will be new standards requiring all construction materials used in federal infrastructure projects to be built in America.”
Summers said this approach would make projects more expensive, ultimately requiring more tax revenue to pay for the same amount of construction. The additional costs would likely dwarf the hidden surcharges that Biden also targeted in his speech to action.
Summers, referring to Biden’s push against hotels, airlines and others, said, “My guess is that those higher prices — from the things we’re doing through policy — are probably more of a consumer burden than all the junk fees.” Add more.” Hidden fees of companies.
(Adds commentary on ‘Buy American’ push in last five paragraphs.)
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Source: finance.yahoo.com
