Former US Treasury Secretary Lawrence Summers publicly criticized the Federal Reserve on Thursday, stating that it is still hinting at preparing to cut interest rates in the coming months despite the strong US economy and rising inflation.
He said on a program, "My feeling is that the Federal Reserve is still eager to start cutting interest rates, but I don't fully understand that." Considering the performance of the economy and financial markets, I don't know why we are so eager to talk about rate cuts.
The day before Summers' speech, the Federal Reserve announced its latest interest rate resolution once again, and it is still expected to cut interest rates three times within the year. Federal Reserve Chairman Jerome Powell stated that although "we don't want to ignore" higher than expected inflation data for January and February, they "haven't really changed the overall situation of gradually weakening price pressures.".
Summers stated that the Federal Reserve's understanding of neutral policy rates (neither stimulating nor limiting) is flawed, which could lead to a misjudgment of its monetary policy.
"If you don't know what neutrality is, you don't know if you're expanding or limiting," he said.
Although the median long-term expectation for the benchmark interest rate announced on Wednesday was raised from 2.5% to 2.6%, Summers reiterated that his perceived "closer to reality" data is at least 4%. In contrast, the current target range of the Federal Reserve is 5.25% to 5.5%.
Summers said, "I'm not sure how restrictive monetary policy is, but the evidence is real." He said that since the Federal Reserve started raising interest rates two years ago, "monetary policy has been in effect for a long time now," but "the economy is still surprisingly high.".
He said that the unemployment rate is lower than the Federal Reserve's perceived level of full employment. The long-term forecast for unemployment rate by policy makers is 4.1%. The unemployment rate in February was 3.9%.
A more cautious monetary policy stance
At the same time, the former finance minister emphasized that policymakers expect inflation rates to exceed the Federal Reserve's target of 2% this year and next. Summers said that economic growth has also exceeded the country's long-term potential, and the financial situation is "at a very relaxed level.".
Previously, he also emphasized the possibility of further interest rate hikes by the United States, pointing out the need for the Federal Reserve to act cautiously.
In his latest speech, he reiterated that in the context of inflation expectations exceeding targets, strong economic growth, and loose financial conditions, the Federal Reserve may need a more cautious stance on monetary policy to avoid economic overheating and inflation runaway.