Former U.S. Treasury Secretary Lawrence Summers said that since the Federal Reserve (Fed) faces the dual risks of high inflation and slowing economic growth, it must try to find a balance, and interest rates should not exceed 5%.
Summers said the Fed needs to show flexibility so it can hold down prices without tipping the U.S. economy into a deep recession.
He pointed out that the market thinks that, for all the reasons of uncertainty, they are very uncertain regarding the Fed’s next move. He thinks forecasters should be humble and the Fed should make policy flexibility clear.
Summers doesn’t expect rates to rise above 5 percent unless inflation is well above the 2 percent target, and rates won’t fall below 2 percent unless the economy is considerably weaker.
Several Fed officials recently spoke to emphasize the importance of raising interest rates. Federal Reserve Bank of Cleveland President Loretta Mester reiterated that reducing inflation is still crucial and will use the Fed’s tools to complete the job.
Kansas City Federal Reserve Bank President Esther George also said that U.S. households still hold most of the savings they have accumulated since the outbreak, meaning the Fed may need to raise interest rates to higher levels and keep them there for a longer period of time to successfully curb consumer demand , thereby reducing inflation.
Oaktree Capital co-founder Howard Marks (Howard Marks) believes that US inflation may have peaked, but he expects the Fed’s monetary policy rate will remain at around 5% in the next 5 to 10 years. That might mean more cheap assets for Oaktree to buy, and weaker companies needing bailouts.
The Fed will announce the minutes of its November meeting following the market close on Wednesday. The United States raised interest rates by 3 yards (75 basis points) for four consecutive times in that month, and the target range of the federal funds rate has reached 3.75-4.00%.
