Ahead of next week’s Federal Reserve’s monetary policy meeting, former Treasury Secretary Larry Summers sounded a note of caution to central bank officials.
What Happened: “The Fed is in broadly the right place of watchful waiting,” said Summers in a Bloomberg interview on Friday. “The moment they [Fed officials] turn, or announce they're going to turn, is going to be a seismic moment,” he added.
The economist, therefore, advised caution. “For that reason, they probably need to be very deliberative and careful about getting to that point and waiting until they see some overwhelming evidence of inflation being locked in low or see some real evidence of the economy turning over,” he said.
“And I don’t think we have either of those at this point,” he added.
Commenting on the November non-farm payrolls report, Summers said the numbers suggest that, as of last month, the economy remained “pretty robust.” The non-farm payrolls report released Friday showed that the economy added 199,000 jobs in November, ahead of October’s payroll gains of 150,000 and the consensus of 180,000.
The month-over-month increase in the average hourly earnings came in at 0.4% versus expectations of 0.3%. The economist said the bigger-than-expected increase in the metric “reinforces my sense that people need to be careful about declaring the war against inflation as having been won.” The public should be mindful of what could happen from supply shocks and from other adverse developments, he said.
The numbers, the economist said, make a soft landing look more in play. He, however, warned that it would be a mistake to take such a scenario for granted.
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Why It’s Important: The financial markets have rebounded from a lean patch that was seen largely throughout the period between August and October, primarily on hopes that the Fed would begin to ease rates beginning in 2024. The broader S&P 500 index scaled the highest level for the year on an intraday basis on Friday. The SPDR S&P 500 ETF Trust SPY, an exchange-traded fund that tracks the performance of the S&P 500 Index, has gained about 22% so far this year.
The Federal Open Market Committee, the monetary policy-setting arm of the central bank, is scheduled to kick off a two-day meeting on Tuesday.
The Fed will release a post-meeting policy statement and its summary of economic projections, which also includes the dot-plot chart, at 2 p.m. ET on Wednesday. The dot-plot chart is constructed based on each of the Fed officials’ expectations regarding the interest rate trajectory. Chair Jerome Powell is scheduled to host a press conference at 2:30 p.m. ET to explain away the December rate decision and shed light on the near-term monetary policy course.
The futures market is pricing in a 97.1% probability of an interest rate pause at the 22-year high of 5.25% to 5.50%. If the Fed’s language and Powell’s comments do not hint at rate cuts at least by the middle of next year, risky bets could come unwinding.
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