The Fed made another mistake? Former US Treasury Secretary: There is a significant risk of worsening inflation!

Lawrence Summers, former US Treasury Secretary, said that inflation may prevent the Federal Reserve from significantly cutting interest rates in the coming years.

Summers stated in a program, "If the Fed's monetary policy is as aggressive as they think, there is a significant risk of worsening inflation."

Federal Reserve policymakers, in their latest forecast for benchmark interest rates, expect the median benchmark rate to be 3.4% by the end of next year - this means that in addition to the 50 basis point rate cut announced on Thursday, the Fed may further cut rates by 150 basis points.

The Harvard University professor mentioned that if inflation pressures reappear, "interest rates will not drop significantly as officials predict in the so-called 'dot plot'."

He warned that investors are also overestimating the extent to which the Fed will loosen monetary policy in the future. He said, "I doubt that long-term bond yields will rise to some extent - perhaps the 10-year Treasury yield or the 30-year Treasury yield will see a significant increase."

Currently, the yield on 10-year US Treasury bonds is about 3.73%, far below last year's peak of over 5%. Summers pointed out that over time, rising yields will push up US mortgage rates. The decline in mortgage costs has only recently begun to drive housing loan demand, bringing hope for a recovery in the real estate industry.

Summers said, "The mortgage rates people see now may be relatively low compared to the average level over the next five years."

According to data from the American Mortgage Bankers Association, the 30-year fixed-rate mortgage rate was about 6.15% last week, lower than the 6.78% at the beginning of the year. The average rate over the five years before the COVID-19 pandemic was around 4.2%.

Summers reiterated his view that the Fed underestimated the neutral rate, with policymakers believing that at this rate, it is consistent with maintaining a 2% inflation rate.

Fed officials raised their expectations for the neutral rate in their latest forecast on Thursday, with a median of 2.875%. Fed Chairman Powell said at a press conference that the neutral rate "may be much higher than in the years before the COVID-19 pandemic," when global government bond yields were negative in the trillions of dollars.

Powell said, "We don't know" what the neutral rate will be. "We only know through observation," he said, if the Fed's policy is set below the neutral rate, inflation will rise.

Summers stated that "higher fiscal borrowing and significant investments in renewable energy and artificial intelligence suggest that the neutral rate is at least 4%."