On Friday, March 8th local time, renowned financial commentator and former US Treasury Secretary Lawrence Summers warned that the Federal Reserve's assessment of neutral interest rates was wrong, and the likelihood of decision-makers ultimately not cutting rates this year has increased.
Summers said, "Things have fundamentally changed, and I'm not sure if the Federal Reserve is fully aware of this. Neutral interest rates are much higher than the 2.5% that the Fed likes to talk about."
The so-called neutral interest rate refers to the level of interest rates that neither stimulate the economy nor drag down the economy. Federal Reserve officials currently generally consider 2.5% as a neutral interest rate, but some doubt whether 2.5% meets the level of a neutral interest rate.
The Federal Reserve initiated a rate hike cycle in March 2022, and after 11 rate hikes, the target range for the federal funds rate reached 5.25-5.5% in July last year. Since then, the Federal Reserve has remained silent at interest rate meetings for four consecutive times.
Summers said, "When the Federal Reserve compares a 5% interest rate to what it considers to be a neutral interest rate of 2.5%, it is wrong to say that monetary policy is actually restrictive."
He pointed out that the neutral interest rate is much higher than the level perceived by the Federal Reserve, closer to 4% rather than 2%.
Federal Reserve Chairman Powell stated at a congressional hearing on Thursday that current interest rates have entered a restrictive range, far above neutral levels. He said that the Federal Reserve is not far from obtaining the confidence needed to lower interest rates.
Summers said the possibility of not lowering interest rates this year is increasing
Summers called on the Federal Reserve to be extra cautious when initiating interest rate cuts. He also warned that the current bet in the financial market on this year's interest rate cut may be too high, and if people believe that the Federal Reserve will inevitably cut rates this year, they are completely wrong.
Summers cited non farm payroll data from the United States in February, stating that while the unemployment rate has risen to a two-year high, wages continue to rise, reflecting a strong economy.
The data released on Friday showed that the non farm payroll in the United States increased by 275000 people after the quarterly adjustment in February, significantly higher than the market expectation of 200000 people; The unemployment rate unexpectedly rose to 3.9% in February, a new high since January 2022, and the market was originally expected to remain unchanged at 3.7%; The average hourly wage in February increased by 0.1% month on month, with a year-on-year increase of 4.3%.
Summers pointed out that he had stated last month that the probability of the Federal Reserve not cutting interest rates this year was about 15%, and now this number may have slightly increased.