Former U.S. Treasury Secretary Lawrence Summers said the Federal Reserve should not falter over aggressive interest rate hikes, and any hesitation would have a bigger impact on the economy.
The Harvard professor said on Friday (16th): “There are many examples in history that if the policy adjustment in response to inflation is significantly delayed, it will be very expensive. As far as I know, no central bank in history has been super fast. A major example of how inflation has paid a huge price.”
Quoting a recent article by former Fed Governor Frederic Mishikin, he pointed out that even former Fed Chairman Paul Volcker, who was known for aggressive rate hikes during his tenure, had a wobbly start to the wrong start. Volcker’s stance was loosened by weak economic data in the spring of 1980, which led to a complete reversal of policy and a need to raise interest rates much higher than needed.
Summers believes that the inflation problem has been obviously ignored before and must be solved by a very large monetary policy adjustment. “The market must wake up to this fact.”
Forecast for U.S. endpoint rates
He also reiterated his view on the apex of this cycle of rate hikes, with more than 4.5% more likely than less than 4.5%, and he wouldn’t be surprised if the terminal rate rises above 5%.
The Fed is expected to raise rates by at least 3 yards (75 basis points) next week, raising the target range for the federal funds rate to 3.00-3.25%.
The interest rate futures market currently estimates that the terminal rate will appear in the spring of next year, close to 4.5%. Wall Street estimates are generally more than 4%, and Deutsche Bank boldly estimated that the endpoint rate will be as high as 4.9%, far exceeding the market price.
But “new debt king” Gundlach (Jefferey Gundlach) predicts it will rise to 4%, but doubts it will rise to 4.4% expected by the market.