Fed Rate Cut Would Be a Dangerous and Egregious Error, Says Former Treasury Secretary Larry Summers

Former Treasury Secretary Larry Summers is warning that a potential rate cut by the Federal Reserve would be a serious mistake.

In a new interview with Bloomberg Television, Summers comments on the latest core consumer price index (CPI) numbers that came in hotter than expected, saying that no one should be surprised by the presence of accelerated inflation.

“I was not hugely surprised by the numbers. In an economy that is growing faster than potential, we’ve had an unemployment rate that has a three handle in the presence of massive and growing budget deficits, and epically easy financial conditions, the idea that inflation would remain robust or even accelerate should not be a surprise to anyone.”

Recently, Summers co-authored a paper that aimed to paint an alternate and more accurate view of inflation by incorporating economist Arthur Okun’s pre-1983 system of measuring inflation, which took into account personal interest rates and housing financing costs.

The paper argues that when using the Okun-era system, the Fed’s current data – which uses the “supercore inflation” concept – drastically understates the amount of inflation the US is dealing with.

Given that inflation is almost certainly much higher than officially admitted, Summers says a rate cut in June would be a grave error on the part of the Federal Reserve.

“It was not me or some outside observer who emphasized the concept of supercore inflation, that is taking out the transitory stuff and also taking stuff like housing. And by that measure, inflation is running above a 6% rate, and the three-month rate exceeds the six-month rate, and the six-month rate exceeds the one-year rate.

This confirms the idea that the neutral rate is way above the 2.6% level that the Fed has been using as a North Star…

You have to take seriously the possibility that the next rate move will be upwards rather than downwards. 

And anything could happen. Markets could crash, indicators could turn down, but on current facts, a rate cut in June – it seems to me it would be a dangerous and egregious error comparable to the errors the Fed was making in the summer of 2021 when it just didn’t get the thread on inflation.”

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