In an interview aired on Friday’s edition of Bloomberg’s “Wall Street Week,” the Harvard professor and economist, chairman of the National Economic Council under President Barack Obama and finance minister under President Bill Clinton, said: Secretary Larry Summers said that “a huge new private sector conglomeration” and “the ongoing investments in green investing and IRAs” would put upward pressure on interest rates.
Summers said he finds “the Fed’s idea that the ultimate neutral rate is 2.6 in the current situation to be strange.” This is compared to a few years ago when they said it was 2.5. Fiscal policy has become much more expansionary, budget deficits have grown much higher, and debt has played a much larger role. That will put pressure on credit markets. There is a huge amount of new private sector investment underway in terms of green investment and the IRA is underway in terms of resilience and reducing dependence on single resources. With the AI revolution, there is a huge potential source of demand for chips and power. And in recent years, both the housing market and the stock market have risen significantly, so we have a huge wealth effect. So, despite the impulse to demand this, I cannot understand why someone would form the view that the neutral interest rate is essentially the same as what he thought four years ago. And I think it’s much more likely that he’ll have four handles than that the neutral rate at this point is that he’ll have two handles. ”
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