Larry Summers Says We're In An Environment Of 2-Sided Risk: 'Forecasters Should Have Humility'

Former Treasury Secretary Lawrence H. Summers has said the markets are uncertain about what the U.S. Federal Reserve will do in the current economic environment which is witnessing a two-sided risk.

Markets are saying, given all the uncertainties, they are very uncertain what the @federalreserve will do. Forecasters should have humility and the @federalreserve should make clear its flexibility. We are very much in an environment of two sided risk.

— Lawrence H. Summers (@LHSummers) November 21, 2022

“Markets are saying, given all the uncertainties, they are very uncertain what the @federalreserve

will do. Forecasters should have humility and the @federalreserve should make clear its flexibility. We are very much in an environment of two-sided risk,” Summers tweeted.

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Rates: The former Treasury Secretary also stated that he does not expect to see the rates above 5% unless the inflation is well above the 2% target, or rates below 2% unless the economy was quite weak.

Wall Street has begun to take the Fed talk into consideration as major indices lost steam over the last few days and fears of fresh COVID cases emanating from China also started weighing in. The SPDR S&P 500 ETF Trust SPY ended Monday’s session 0.36% lower while the Vanguard Total Bond Market Index Fund ETF BND ended flat.

Odds: Summers pointed out that options on interest rates imply significant risks of inflation or a prolonged downturn in the U.S. over the next several years. He said that the odds are about even that 3 years from now, 1-year rates will be more than 5% or less than 2% while the odds are more than a quarter that they will be more than 6% or less than 1%. “Low rates are more likely than high rates,” he said.

“I read this as the market regards a protracted period of weakness as very possible and seeing some risk of continuing above-target inflation,” Summers said.

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Photo courtesy: Brookings Institution on Flickr