Former US Treasury Secretary Summers also said that if the Federal Reserve lowers interest rates to the level expected by the market, that is, the futures market shows that the benchmark interest rate will drop to about 3% in the next two years, he would be surprised. Summers also pointed out on the same day that he believed another serious mistake made by the Federal Reserve was thinking that the neutral interest rate was so low
On Friday, the "inflation whistle-blower" of the United States, former U.S. Treasury Secretary Summers, stated that although the Federal Reserve failed to act promptly to address the surge in U.S. inflation in 2021, hitting a low point in its monetary policy history, it ultimately made sufficient efforts to correct the economy.
Summers said, "I must commend the Federal Reserve. Although it is not always obvious, they have taken strong and proactive actions to maintain stable inflation expectations. We all make a lot of mistakes. What's important is to recognize them and correct them when you make a mistake."
Shortly before Summers made his remarks, Federal Reserve Chairman Powell announced on the same day that it is now time for policy adjustments, as consumer price increases have cooled down, inflation risks have diminished, and employment risks have increased. Powell also admitted that the initial assessment in the spring of 2021 that inflation would be "transitory" was proven wrong later that year.
While Summers stated that the Fed's readiness to cut rates at the September meeting was the right move, he also believed that caution is needed regarding the medium-term outlook for monetary policy.
Summers said that if the Fed were to lower interest rates to the level expected by the market, namely cutting the benchmark rate to around 3% over the next two years as indicated by the derivatives market, he would be surprised. The current target range for the federal funds rate is 5.25%-5.5%.
Regarding the Fed policymakers' estimates of the long-term neutral interest rate, Summers pointed out that the Fed officials' expectations are below 3%, which is still too low. Due to the large U.S. fiscal deficit and strong investments in green economy and advanced technologies, all of which are putting pressure on borrowing costs, the so-called neutral rate may be higher than in the past.
Summers bluntly stated, "I think the Fed made a serious mistake in thinking that the neutral rate is so low, thus misjudging the restrictiveness of any given policy level. If you don't have the right North Star, you can't navigate accurately."