Former Treasury Secretary Larry Summers told investors not to rule out a surprise rate hike given that inflation remains stubbornly high — even as Wall Street bets that the Fed will begin slashing interest rates as soon as this spring.
“There’s a meaningful chance — maybe it’s 15% — that the next move is going to be upwards in rates, not downwards,” Summers told Bloomberg Television on Friday.
“The Fed is going to have to be very careful.”
Summers was asked about the latest data showing that wholesale prices jumped higher than expected.
The producer price index for final demand rose 0.3% last month, the largest increase since August 2023, after declining by a revised 0.1% in December, the Labor Department’s Bureau of Labor Statistics said last week.
Economists polled by Reuters had forecast the PPI gaining 0.1% following a previously reported 0.2% drop.
The surprise print followed the Consumer Price Index rising a higher-than-expected 3.1% in January — above the 2.9% economists had forecast.
The PPI and CPI figures fueled sentiment on Wall Street that the Fed will not slash interest rates in March — as many had hoped.
Summers said the latest figures could be indicative of a “mini-paradigm shift.”
He pointed to housing costs, viewed by many as a bellwether of cooling inflation. Summers said that housing prices have not come down hard enough to warrant interest rate cuts.
“That’s not the only disturbing indication,” Summers said.
He also noted that core inflation, which excludes food and energy costs, has been surging due to wage growth.
“It sure looks like super-core was explosive in January,” Summers said.
Core CPI rose 3.9% in January compared to a year ago, though it is down from its peak of 6.6% in September 2022.
Summers said the latest statistics show that there is still room for inflation to fall before the Fed loosens up its monetary policy.
“The assumption that inflation was headed down to 2% in a tranquil, healthy, real economy has certainly been called into question by these data,” he told Bloomberg.
If the Fed does decide to cut interest rates, Summers said not to expect it in May.
“May is odds-off at this point,” he said. “And probably should be odds-off.”
Fed Chair Jerome Powell said earlier this month that the central bank can be “prudent” in deciding to “just give it some time and see that the data confirm that inflation is moving down to 2% in a sustainable way.”
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