(Bloomberg) -- Former Treasury Secretary Lawrence Summers said the Federal Reserve should hold off on a shift toward lowering interest rates until there’s decisive evidence showing that inflation is back under control or that the economy is entering a slump.
“The moment they turn, or announce they’re going to turn, is going to be a seismic moment,” Summers said on Bloomberg Television’s Wall Street Week with David Westin. “And for that reason, they probably need to be very deliberative and careful about getting to that point.”
A marked slowdown in inflation in recent months has stoked optimism on Wall Street that the Fed will lower rates by the spring of 2024. Chair Jerome Powell said last week that “progress must continue” to get to the Fed’s 2% target. He noted that policymakers’ preferred gauge of prices — the core PCE index, which strips out volatile food and energy costs — ran at an annual rate of 2.5% over the six months through October.
Fed officials probably need to wait “until they see some overwhelming evidence of inflation being locked in low, or see some real evidence of the economy turning over,” said Summers, a Harvard University professor and paid contributor to Bloomberg TV.
Such evidence remains to be seen, he said, speaking shortly after the latest US jobs report. The release showed a bigger-than-expected gain in payrolls in November, along with a surprise drop in the unemployment rate to 3.7% and a pickup in average hourly earnings to a 0.4% monthly pace.
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“These were good numbers — they showed an economy that, at least as of November, was still looking pretty robust,” Summers said. The acceleration in wages “reinforces my sense that people need to be careful about declaring the war against inflation as having been won.”
While a soft landing, where prices come under control without a recession, is looking “more in play,” it’s not an outcome to be confident about at this point, according to Summers.
Policymakers need to make sure that progress on bringing inflation down becomes “entrenched and locked in,” he said. One dilemma is that, when data show disinflation, it stokes optimism in markets that eases financial conditions — which “undoes some of the tightening that they have already put in place,” Summers said.
Overall, the former Treasury chief endorsed the current stance of Powell and his colleagues of proceeding “carefully” with policy. The Fed’s “broadly in the right place of watchful waiting,” Summers said.
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