Former US Treasury Secretary Summers makes a big U-turn! Believes a 50 basis point rate cut in September is appropriate, boosting US stocks

Afternoon on Friday, August 9th, "American Inflation Whistleblower" Summers, who served as the US Treasury Secretary in the Clinton administration, made a new statement, suggesting that a significant 50 basis point rate cut by the Federal Reserve in September may be appropriate, marking a significant shift from his previous more hawkish views.

This caused a short-term rally in the US stock market, with the Nasdaq 100 rising over 0.8% at one point, and the Russell small-cap stocks reversing from a decline to an increase. However, within an hour of his comments, the Dow and Russell small-cap stocks turned slightly lower again, while the S&P and Nasdaq gains narrowed to 0.3%.

Summers: No Need for Emergency Rate Cut, Supports Significant Rate Cut in September, but has been advocating for Fed to raise rates next

Summers stated in a media program that given the reduced market volatility and selling pressure in the stock market since Monday's turmoil, "based on current facts," any emergency rate cut from the Fed is unnecessary, but his views on rate cuts have changed:

"Emergency measures (referring to an emergency rate cut before the regular FOMC meeting in September) would lead to uncertainty, market panic, overheating, and backfire. However, a 50 basis point rate cut at the September policy meeting may be appropriate."

The Fed Watch tool from the Chicago Mercantile Exchange (CME) shows that futures traders have significantly reduced their bets on a 50 basis point rate cut by the Fed in September, with the likelihood of a 25 basis point cut now around 50%, compared to the previous expectation of a significant rate cut on Monday.

Market expectations for a 50 basis point rate cut in September were as high as 85% on Monday, but gradually fell to close to 50%.

Summers' latest remarks represent a major reversal from his consistent hawkish stance.

Just a month ago on June 24th, he criticized the Fed and investors for their "seriously mistaken" views on the inflation path, considering the record-high US budget deficit and ongoing growth, he believed that people were too optimistic about inflation expectations, and fiscal challenges would continue to support demand and put upward pressure on prices:

"Recent data showing a slowdown in inflation is to some extent an illusion caused by the normalization of prices after the pandemic. The market should not expect this trend to continue.

The Fed's target interest rate range of 5.25% to 5.5% is not too restrictive for the economy, and investors should not expect rates to start falling significantly from now on."

Summers has long been known as the "American Inflation Whistleblower." Last year, he believed that the market and policymakers exaggerated the likelihood of multiple rate cuts in 2024, and argued that the Fed severely underestimated the long-term neutral interest rate level. He stated that the neutral rate necessary to prevent rapid price increases should be at 4.5%, while the Fed raised its neutral rate expectation from 2.5% to 2.8% in June Looking back at his previous remarks this year, in February and April, he believed that "serious consideration must be given to the Fed's next move to raise interest rates," rather than the market's general expectation of a rate cut, as inflation pressures continue to exist and seem to be accelerating. In March, he criticized the Fed for "not being able to contain the urge to start cutting rates," believing that in a strong economy indicating that inflation is still too high, the Fed should not imply readiness to cut rates in the coming months.

Summers warns against US presidents intervening in monetary policy, he once criticized Trump's policies as the "mother of stagflation"

Today, Larry Summers, an economist for the Democratic Party in the United States, "as scheduled" criticized Republican presidential candidate Trump.

In response to Trump's Thursday night statement that the US president should have some "say" in monetary policy making, that monetary policy making is based on intuition and his intuition is better than Fed officials, Summers said he was "shocked at how bad this idea is."

He strongly opposes political interference in the independence of the Fed, warning against allowing the US president to intervene in monetary policy making, as it will ultimately only harm the economy: "Letting politicians get involved is a foolish game... the end result is higher inflation and a weaker economy."

Summers stated that the US president has many things to do at all times, and in fact, his relationship with the economy is far less close than the 19 members of the Fed Board of Governors and the Fed Chair, who focus on constantly reviewing every economic statistic. He emphasized that central banks around the world have long granted independence to central banks because they recognize "serious conflicts of interest" among politicians in monetary policy:

"Politicians always can't resist printing more money, lowering interest rates - stepping on the gas pedal to boost the economy. This will raise people's inflation expectations and push up long-term interest rates. You will only get higher inflation, but no substantial output growth."

On June 14th, Summers criticized Trump's tax ideas as the "Mother of All Stagflations" and called on Republican-leaning economists and corporate executives to speak out. He believes that the idea of ​​raising tariffs to offset some income tax cuts would cause great harm to the US and global economies, and even trigger a "global economic war."

Summers also suggests that the SEC and exchanges investigate the liquidity issues behind Monday's VIX surge

In addition, Summers today called on the US Securities and Exchange Commission (SEC) and major exchanges to investigate the surge in the "fear index" VIX on Monday (August 5th, the day after the non-farm payroll report).

He believes that because the VIX calculation, which measures short-term volatility in the S&P 500, includes some illiquid instruments, the nearly 200% surge in VIX on Monday to the highest level in over four years since March 2020, was due to some artificial factors causing the volatility:

"As this is a widely watched indicator, I believe industry stakeholders and regulatory bodies such as the U.S. Securities and Exchange Commission should study the liquidity issues of this indicator and how it settles.

Looking at VIX futures, a slightly different tool, one would find that its volatility was much lower at the time, not as dramatic. Therefore, Monday's historic surge in VIX is more about options market liquidity issues rather than a profound reassessment of the U.S. economy."