Former U.S. Treasury Secretary Summers: Inflation may break out again, the Fed may raise interest rates next

Source: Jinshi Data

Four years ago, former U.S. Treasury Secretary Lawrence Summers slammed U.S. fiscal and monetary policymakers for overstimulating the economy, leading to the biggest risk of inflation in a generation. Now he is warning again that price pressures are in danger of breaking out again.

"This may be the most sensitive moment we face for escalating inflation since the policy mistakes in 2021 triggered serious inflation," Summers said on the "Wall Street Week" TV show.

Summers pointed out that signs of tightness in the job market, including a sharp increase in wages in the January employment data released last week, have provided the backdrop for a potential rebound in consumer prices, even before the new administration takes any action. Since the data was released, U.S. President Trump has also raised tariffs on imported goods and threatened to add a series of other tariffs.

“This is a moment when we have to be very cautious about inflation — even before the White House comes out with policy,” said Summers, a Harvard University professor and paid contributor to Bloomberg Television.He urged the Fed to remain vigilant to price pressures and argued that further rate cuts are likely to be few in the current cycle.

Federal Reserve Chairman Jerome Powell reiterated his view last month at a Senate hearing on Tuesday that the Fed need not rush to cut interest rates after cutting its benchmark rate by 1 percentage point in the final months of 2024.

“It’s not a probability, but there is a very real possibility right now that the Fed’s next move will be to move rates up, not down,” Summers said.This is a particularly dangerous moment for any kind of cost shock, any kind of rhetoric that undermines the credibility of inflation, any kind of fiscally irresponsible measures.”

In early 2021, Summers warned that Biden’s $1.9 trillion fiscal package had the potential to fuel inflation, unsettling some fellow Democrats. He also criticized the Fed for not paying enough attention to price risks.

Powell admitted in March 2022 that "in hindsight, we should have raised rates sooner." Biden's team, by contrast, continues to defend their approach. Janet Yellen, a former Treasury secretary, argues that the bigger mistake was not doing enough, leaving the labor market scarred for years.

Today, many economists warn that Trump's moves to deport undocumented immigrants and tighten border controls could add to labor market pressures. Higher tariffs could also lead to at least a one-time, if not sustained, increase in price levels.

The January jobs report showed an increase of 143,000 jobs, below the median forecast of economists. But Summers noted that the revised job gains in the previous two months were 100,000, and the San Francisco Fed's weather-adjusted estimate showed an increase of more than 200,000 jobs last month.

"That's faster than the economy can absorb on a regular basis, especially with immigration. So it's not terribly surprising that wage growth has picked up a lot," the former Treasury secretary said. Average hourly earnings climbed 0.5% that month from December, beating all forecasts.

He also pointed to a University of Michigan survey that showed signs of rising inflation expectations. On Monday, another New York Fed survey also showed rising price expectations.