Former Treasury Secretary Larry Summers is strongly advising against a potential rate cut by the Federal Reserve.
Inflation Concerns
Summers highlights the recent core consumer price index (CPI) numbers, which exceeded expectations, as evidence that inflation is accelerating. He emphasizes that the presence of inflation should not be surprising given the strong economic growth, low unemployment, and loose financial conditions.
Alternative Inflation Measure
Summers and his co-authors recently proposed an alternative inflation measurement system that incorporates personal interest rates and housing financing costs. According to this system, inflation is significantly higher than officially reported.
Consequences of a Rate Cut
Summers warns that a rate cut in June would be a grave mistake. He points to the high inflation rate, as measured by the alternative system, and argues that the Fed’s current neutral rate of 2.6% is far too low.
He believes that the next rate move should be an increase rather than a decrease. While acknowledging that market conditions could change, Summers maintains that a rate cut would be a serious error similar to the Fed’s mishandling of inflation in 2021.
