Larry Summers Says June Rate Cut Could Be 'Dangerous And Egregious Error' After Hotter-than-Expected March Inflation Data

The March inflation report came in hotter than expected, stirring concerns among market participants and one section of the economists. Former Treasury Secretary Larry Summers, who is in “Team Persistent” when it comes to inflation, on Wednesday warned of the pitfalls of ignoring pricing pressure in the economy.

Not A Surprise: “I was not hugely surprised by the numbers,” said Summers in an interview with Bloomberg.

Consumer prices rose 0.4% month-over-month and 3.5% year-over-year in March, both coming in one-tenth of a percentage point above expectations. The core inflation came in at a monthly rate of 0.4% and annual rate of 3.8%. These were ahead of the 0.3% and 3.7% rates forecast by economists.

“In an economy that was growing faster than potential, with an unemployment rate that has a three handle [over 3%], in the presence of massive and growing budget deficits and epically easy financial conditions, the idea that inflation would remain robust or even accelerate should not be a surprise to anyone,” the economist said.

Even super core inflation, which is arrived at by removing transitory stuff and housing, was running above 6%, the former Treasury official said. He also noted that shorter-term Treasury rates exceeded the longer-term rates.

“This confirms the idea that the neutral rate is way above the 2.6% level that the Fed has been using as a north star,” he said.

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Implications For Rates: Summers, who has been warning of a real possibility of a rate hike, repeated his view. “It’s still not what I would expect, but you have to take seriously the possibility that the next rate move will be upwards rather than downwards and anything could happen,” he said.

“Markets could crash, indicators could turn down, but on current facts, a rate cut in June, it seems to me, would be a dangerous and egregious error comparable to the errors the Fed was making in the summer of 2021 when it just didn’t get the threat on inflation,” he said.

Following the March inflation data, the futures market has tempered expectations concerning a rate cut in June. The CME FedWatch tool now showed an 83% probability of a status quo stance from the Federal Reserve.

The iShares TIPS Bond ETF (NYSE:TIP), an ETF tracking the investment results of an index composed of inflation-protected U.S. Treasury bonds, ended Wednesday’s session down 0.96% $105.84, according to Benzinga Pro data.

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