Larry Summers Says Next Fed Move Could Be Up Rather Than Down As Inflation Data Calls Into Question The 'Soft-Landing Paradigm'

Consumer and producer price inflation numbers for January came in hotter than expected, denting investor expectations for a Fed rate cut in the near term. Former Treasury Secretary Larry Summers on Friday weighed on the numbers and their implications for interest rates.

Inflation Unlikely To Budge: There is a possibility that the economy is going through a mini paradigm shift, Summers said in a Bloomberg “Wall Street Week” interview.

“The soft-landing paradigm with the assumption that inflation was headed down to two [percent] in a tranquil, healthy real economy has certainly been called into question by these data,” the economist said.

Economists’ assumption that housing was going to be a major deflationary force was not substantiated by the week’s consumer price inflation numbers on owner-occupied housing, he said.

Summers noted that most people estimate the cost to rent a residence by looking at all rentals. Most rentals are apartments, which do not have much to do with owner-occupied housing costs, he said.

“If you look at the data focused on single-family housing, houses with lawns and suburbs and the like, you don’t get nearly as deflationary a picture,” he added.

The economist said the model he has been using for several years factors in owners-equivalent rent, accounting for 30% of the core CPI inflation, at 3%-4% for the remainder of the year.

“If it’s running at three-and-a-half, that uses up a lot of the room there is under under a 2% inflation target,” he said.

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Fed Needs To Tread Cautiously: Summers said the Fed needs to be very careful. A March cut seems premature, the economist noted, adding “May is odds off at this point.”

He also issued a hawkish comment about the interest-rate trajectory.

“We’ve got to recognize what no one’s talking about. There’s a meaningful chance, maybe it’s 15%, that the next move is going to be upwards in rates, not downwards in rates,” he said.

“Many people who confused what they wanted with what was real, were in too much of a hurry to declare that we were obviously in a phase of major easing with respect to monetary policy.”

Summers also said he wasn’t a big fan of having a specific and tight inflation target of 2%. Economists, including Nobel laureate Paul Krugman, have highlighted the necessity of increasing the Fed’s inflation target.

The iShares TIPS Bond ETF TIP, an exchange-traded fund that tracks the investment results of an index composed of inflation-protected U.S. Treasury bonds, ended Friday’s session down 0.10% at $106.16, according to Benzinga Pro data.

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Photo: World Economic Forum via Wikimedia Commons