(Bloomberg) -- Former Treasury Secretary Lawrence Summers said inflation will probably prevent the Federal Reserve from lowering interest rates as much as expected in coming years.
“The risks of actually going as far with monetary policy as the Fed seems to think that it will are pretty significant in terms of having an increase in inflation,” Summers said on Bloomberg Television’s Wall Street Week with David Westin.
Fed policymakers, in their new projections for their benchmark rate, have a median estimate of 3.4% for the end of next year — reflecting a potential further 1.5 percentage points of cuts on top of the 50 basis points unveiled Wednesday.
Should inflation pressures reemerge, “then you won’t see interest rates go down as much” as officials predicted in their so-called dot plot, said Summers, a Harvard University professor and paid contributor to Bloomberg TV.
He cautioned that investors too are overestimating the amount of Fed easing to come.
Higher Rates
“My suspicion is that there’s some upwards adjustment ahead in longer term rates — perhaps quite significant upwards adjustment in the 10-year rate or the 30-year rate,” he said.
Ten-year Treasury yields were at 3.73% as of 4 p.m. in New York, well down from last year’s high above 5%. Higher yields in time would drive up US mortgage rates, Summers noted. A decline in those borrowing costs have only recently started to fuel demand for home loans, offering hope of a rebound in the housing market.
“The rates that people are now seeing on mortgages may be relatively low compared to what the average of where they’re going to be over the next five years,” Summers said.
Thirty-year fixed-rate mortgages last week were around 6.15%, according to the Mortgage Bankers Association down from 6.78% at the start of the year. They averaged about 4.2% in the half decade before the pandemic.
Summers reiterated his view that the Fed is underestimating the neutral rate, or the long-run rate at which policymakers see their benchmark as consistent with maintaining 2% inflation.
Fed officials did boost their estimate in the latest projections on Wednesday, with the median rising to 2.875%. Fed Chair Jerome Powell said in his press conference that the rate “is probably significantly higher than it was” in the pre-pandemic years when trillions of dollars of government bonds around the world carried negative yields.
Powell said “we just don’t know” where neutral will be. “We only know it by its works,” he said, referring to being able to see inflation climb if the Fed’s policy setting is below neutral.
Summers said higher fiscal borrowing and major investments in areas including renewable energy and artificial intelligence indicate a higher neutral rate, of at least 4%.
Nippon Steel
The former Treasury chief separately applauded the apparent move by the Biden administration to postpone a review of Nippon Steel Corp.’s proposed takeover of United States Steel Corp. Bloomberg reported this week that the Japanese company was given permission to refile its plans.
“We avoided what would have been a catastrophic act” for both Pennsylvania steelworkers and users of steel including US automakers and the defense industry, Summers said. “My hope would be that in the much less fevered environment that’s likely to exist after the election, cool heads can prevail” and the market allowed to operate, he said.
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