Former US Treasury Secretary: The Federal Reserve may ultimately not cut interest rates significantly
Former US Treasury Secretary Summers pointed out that the Federal Reserve's monetary policy is not tightening as expected by the market, which may lead to a market bubble. He noted that the US economy is strong, while Wall Street giants like Morgan Stanley's Damon have predicted a recession. Summers warned that the Fed may not cut interest rates significantly as expected by the market, and said that the current expectations of rate cuts may disappoint the market. The S&P 500 is approaching a historical high, and Summers believes that the market is on the edge of a bubble
Former U.S. Treasury Secretary Summers said that the Fed's monetary policy is not as tight as investors might think, making it easier for the market to enter bubble territory.
Summers said in an interview with Bloomberg last Saturday that the U.S. economy remains strong, with good employment conditions and resilient economic growth. This has surprised some Wall Street giants like JPMorgan CEO Dimon and Bridgewater Associates founder Dalio, as they had previously predicted that the economy would enter a recession as the Fed began to combat inflation.
However, Summers pointed out that the strong U.S. economy may actually be bad news for U.S. stocks, as it indicates that the Fed's monetary policy is not as tight as the market believes.
Previously, the Fed had raised rates by 525 basis points to combat inflation, but Summers estimated that the neutral interest rate level, which neither restrains nor stimulates economic growth, had increased from about 2.5% to around 4%.
Summers said of higher rates, "I think this situation will continue for some time." He also warned, " The Fed may ultimately not cut rates as significantly as the market currently expects."
The market may be disappointed later this year as investors eagerly anticipate a significant rate cut by the Fed in 2024. According to the Fed's CME Group tool, the market currently expects a 57% probability of the Fed cutting rates by 100 basis points or more by the end of this year.
However, Summers warned that the likelihood of the Fed not cutting rates in 2024 may have slightly increased to over 15%, which is bearish for U.S. stocks.
Given that monetary policy is not as restrictive as the market believes, U.S. stocks may also show signs of trouble. The S&P 500 index approached a series of historical highs in 2024, a winning streak that market experts warn is unsustainable.
Summers said, " We are at least on the edge of a bubble, I don't think the financial markets are showing clear signs of a bubble as they have in other periods. But that doesn't mean we are far from that situation yet."