Larry Summers Slams Fed's 'Excessive Optimism' On Inflation And Underestimation Of Long-Term Interest Rates, Says The Central Bank 'Is Badly Wrong…'

Former U.S. Treasury Secretary Larry Summers has criticized the Federal Reserve’s optimistic stance on inflation, warning that the central bank is underestimating the long-term interest rates necessary to curb inflation.

What Happened: Summers, speaking at an event organized by the Council on Foreign Relations in Washington on Monday, dismissed the recent data indicating a slowdown in inflation as a temporary effect of post-pandemic price normalization, reported MarketWatch.

“Given the magnitude of our fiscal challenges … I think there's a bit of excessive optimism about inflation,” Summers said, referencing a recent trend of record budget deficits. He believes these deficits will continue to support demand and exert upward pressure on prices.

“My best guess is [the Fed] is badly wrong that the neutral interest rate is 2.5%,” he said. “My guess is that the neutral rate is 4.5%.” Earlier this month, Fed officials raised their estimate of the neutral rate to 2.8%.

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Summers’ comments come amid growing speculation about potential interest rate cuts. The CME FedWatch Tool indicates a nearly 70% chance of multiple rate cuts before the end of 2025, according to the report.

Why It Matters: Summers’ comments add to the ongoing debate about inflation and the Fed’s monetary policy. His remarks contrast with those of other prominent figures, such as Janet Yellen, who expressed confidence in the U.S. economy and predicted that inflation would reach the Federal Reserve’s 2% target by 2025.

Summers’ predictions also challenge the views of other experts, such as Bank of America’s Michael Gapen, who expects a “higher-for-longer” rates environment, with the first-rate cut anticipated in December.

Summers’ warning about the potential for higher interest rates stands in contrast with the concerns raised by Mohamed El-Erian, who urged the Federal Reserve to initiate interest rate cuts to prevent potential economic instability.

Moreover, Claudia Sahm the economist behind the "Sahm Rule," which predicts recessions based on unemployment rates, has also voiced concerns, warning that the Fed’s reluctance to cut rates could push the economy into a recession.

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This story was generated using Benzinga Neuro and edited by Kaustubh Bagalkote