A wave of inflationary signals means that the Federal Reserve’s next move could be a rate hike, former Treasury Secretary Larry Summers said.
“There’s a meaningful chance, maybe it’s 15%, that the next move is going to be upwards in rates, not downwards,” Summers said during an interview on Bloomberg TV on Friday, adding that the Fed has to be “very careful.”
His read on recent key inflation indicators in January, including a 3.1% year-over-year increase in the consumer price index and a 0.9% rise in the producer price index, formed the basis of his rationale. He added that the “soft-landing paradigm” has been called into question.
“It’s always a mistake to over-interpret one month’s number — and that’s especially true in January, where calculating seasonality is difficult,” he said. “But I think we have to recognize the possibility of a mini-paradigm shift.”
When it comes to identifying deflationary trends in shelter prices, Summers noted that many economists tend to focus solely on rental markets. Instead, they should shift their focus to owner-occupied houses situated in suburban areas, where he said there’s been little sign of deflationary moves to date.
Another key concern is core services prices, which have been pushed up by higher wages. “It sure looks like super-core was explosive in January,” he said in reference to that measure, which leaves out food and energy costs.
Rate-cut bets have been top of mind for Wall Street this year. The timeline has been continuously pushed back later in the year as inflation remains high and the economy looks to be on solid footing. After pricing in strong odds for a March cut, many forecasters have now placed the first move down in rates at June the earliest.
Summers noted that the Fed isn’t going to want to let up too soon and risk cutting rates while inflation is still a problem.
“The worst thing you can do when the doctor prescribes you antibiotics is finish part of the course, feel better, give up on the antibiotics because you don’t like taking them and see what happens. The disease tends to come back and it tends to be harder to go after the second time.”
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