Former Treasury Secretary Larry Summers has warned that the Federal Reserve might not tighten its monetary policy as much as the market expects, potentially putting the market at risk of entering a bubble.
What Happened: Summers, speaking to Bloomberg, pointed out that despite the Fed’s efforts to combat inflation by raising interest rates by 525 basis points, the U.S. economy remains robust, reported Business Insider.
Summers suggested that the neutral interest rate, a level that neither hinders nor stimulates economic growth, has almost doubled from around 2.5% to 4%. This indicates that the Fed’s monetary policy might not be as tight as the market perceives it to be.
“I think that’s going to be there with us for the next while,” Summers said of higher interest rates. “The Fed may end up not deciding to cut quite as much as markets are now expecting,” he cautioned.
Markets are currently pricing a 57% chance of the Fed cutting rates by 100 basis points or more by the end of 2024, according to the CME FedWatch tool. However, Summers warned that the likelihood of no rate cuts in 2024 has increased to slightly above 15%, which could have a bearish effect on stocks.
“We’re at least at the foothills of bubbles,” Summers said. “I don’t think now that financial markets have the kind of bubbly characteristics that they famously had at other times. But it’s not that we’re a million miles away from that either,” he said.
Why It Matters: Summers has previously expressed concerns about the market’s future. In February, he suggested that the market may be overlooking potential political and social upheavals, despite the ongoing rally.
Summers has also been critical of the economic policies of the two frontrunners in the presidential race, warning that a second term for former President Donald Trump could be “very threatening” to the US economy.
Meanwhile, other experts have also weighed in on the potential impact of Fed rate cuts. Billionaire investor Ken Fisher recently stated that stocks could continue to rise in 2024 without the need for Federal Reserve interest rate cuts.
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