Hike rates

Fed to hike rates above 5%, now priced in to markets

  • Larry Summers expects the Federal Reserve to continue raising interest rates north of 5%.
  • A surge in inflation expectations means markets are widely pricing in further rate hikes, he said.
  • The former Treasury chief warned that inflation posed a bigger threat to the US economy than painful rate hikes.

Larry Summers warned that US interest rates will likely peak above 5%, and he suggested that the market has mostly priced in the upcoming Federal Reserve hikes.

“The terminal rate, according to the fed funds futures, just went above 5,” he said. tweeted Thursday. “It’s kind of a milestone.”

“I think it’s more likely than not to increase further,” he continued. “But the increase already of more than 400 basis points in 18 months is surely the bulk of the increase we will see in this cycle.”

Summers is a Harvard professor of economics, former Treasury secretary and former director of the National Economic Council. From his tweet, he only sees rate expectations climbing a bit more, as they have already risen from less than 1% in spring 2021 to more than 5% today.

The Federal Reserve raised rates from virtually zero in March to a range of 3% and 3.25% today, and forecast a terminal rate as high as 4.9% next year. While Summers expects rates to rise above that level, investors will likely appreciate his view that market expectations are pretty much right now.

The US central bank is raising rates to calm inflation, which hit a 40-year high of 9.1% in June and remained above 8% in September. Higher interest rates make borrowing more expensive and encourage saving rather than spending or investing. They can dampen upward pressure on prices, but can also weaken economic growth and increase unemployment.

Summers has sounded the inflation alarm for a while and urged the Fed to keep raising rates because he thinks a pullback would be disastrous.

For example, it is reported high core inflation, soaring prices for building materials and steep wage increases for workers changing jobs are all signs of price increases embedded in the US economy.

He also pointed to Russia’s invasion of Ukraine as a significant inflation risk, as the conflict has disrupted global supply chains and driven up the price of food, fuel and miscellaneous items. commodities this year.

At the same time, Summers has warned that many people do not fully grasp the economic fallout from the Fed’s rate hike to 5%. Unemployment could rise from 3.5% to over 6%, representing millions of lost jobs, he said.

Still, he pointed out that if the Fed doesn’t tackle the inflationary threat now, it may have to raise rates further in the future. It could also plunge the US economy into a stagflation that sends shockwaves around the world.

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