There is certainly no shortage of ideas on what the Federal Reserve should do when it comes to interest rates, but former Treasury Secretary Larry Summers’ latest proposal is one of the more unique ones of late.
While other economists strongly argue that the central bank should pause its recent trend of rate hikes, Summers tells Bloomberg that the Fed should be open to a half point increased in July, especially if it opts against an increase later this month.
“We are again in a situation where the risks of overheating the economy are the primary risks that the Fed needs to be mindful of,” Summers said. “If they don’t raise rates in June, I think they have to be open to the possibility that they may have to raise rates by 50 basis points in July if the economy continues to stay way hot and if inflation figures are robust.”
Summers’ comments, made Friday, followed the May job report, which was far greater than what analysts were expecting, with payrolls increasing 339,000 vs. Expectations of 195,000.
The Fed has signaled that it plans to keep interest rates steady and skip an increase when it gathers on June 13-14.
But Summers said given the robust state of the economy, he felt the “lower risk strategy” was for the Fed to raise rates this month.
His comments follow a warning he made earlier in the week that the economic situation was worse than the picture drawn by the Congressional Budget Office (which forecast the US budget deficit would rise to 7.3% of gross domestic product in fiscal year 2033).
While Summers is especially hawkish on the economy, he’s one of the few big names calling for additional big rate hikes in the coming months. By contrast, Mark Zandi, chief economist at Moody’s, warned the Fed against “sacrific[ing] the economy to the altar of a 2% inflation target.”
