Former Treasury Secretary Larry Summers warned against the possibility of a surprise rate hike given that inflation remains high, even though Wall Street expects the Fed to begin cutting rates as soon as this spring. He told investors not to exclude them.
“There’s a good chance that the next move will be an increase in interest rates rather than a decrease — perhaps 15%,” Summers said. he told Bloomberg TV on Friday.
“The Fed is going to have to be very careful.”
Summers was asked about the latest data showing wholesale prices were higher than expected.
The final demand producer price index rose 0.3% last month, the largest increase since August 2023, after falling 0.1% in December, the Labor Department’s Bureau of Labor Statistics said last week.
A Reuters poll of economists had predicted that the PPI would rise by 0.1%, down from a previously announced decline of 0.2%.
The surprise report comes after the consumer price index rose a stronger-than-expected 3.1% in January, beating economists’ expectations of 2.9%.
The PPI and CPI data increased sentiment on Wall Street that the Fed would not cut interest rates in March, as most expected.
Summers said the latest numbers may indicate a “small paradigm shift.”
He pointed to housing costs, which many see as a harbinger of subduing inflation. Summers said home prices have not fallen significantly enough to justify a rate cut.
“That’s not the only worrying sign,” Summers said.
He also pointed out that core inflation, which excludes food and energy costs, is rising sharply due to rising wages.
“It certainly seems like Supercore was explosive in January,” Summers said.
Core CPI rose 3.9% year-on-year in January, but was down from a peak of 6.6% in September 2022.
Summers said the latest numbers show there is still room for inflation to fall before the Fed eases monetary policy.
“These data certainly challenge the assumption that inflation will fall to 2% in a calm, healthy real economy,” he told Bloomberg.
Summers said he doesn’t expect the Fed to cut rates, if at all, in May.
“At this point, May is unlikely,” he said. “The odds are probably low.”
Federal Reserve Chairman Jerome Powell said earlier this month that the central bank would be “prudent” to wait “a little while and wait until the data confirms that inflation is sustainably coming down to 2%.” He said it was possible.
