After criticizing the US's excessive stimulus policies in 2021 that could trigger the worst inflation in history (and later proved to be correct), former Treasury Secretary Lawrence Summers today warned again that the risk of prices spiraling out of control is quietly approaching.
Former US Treasury Secretary: This Round of Rate Cuts May Have Ended
Summers warned that inflation is currently facing the most sensitive moment of heating up since the policy missteps in 2021. He emphasized that even without considering the new policies of the White House, the current stage still requires high vigilance against inflation.
Summers called on the Federal Reserve to continue to adhere to the stance of fighting inflation, and believes that in the current interest rate cycle, there may no longer be room for rate cuts, and there may even be another rate hike. He said directly:
"It's not absolutely certain, but there is a very real possibility that the Fed's next move could be a rate hike rather than a rate cut."
He added that this is a particularly vulnerable period, and any cost shocks, statements that undermine market confidence in fighting inflation, or irresponsible fiscal measures could further increase the risk of inflation.
Inflationary Pressure Stems from Wages Rising More Than Expected
Summers believes that inflationary pressure is brewing because the US job market is showing signs of tightening. He pointed out that the sharp wage growth in the January employment report has laid the groundwork for future consumer price increases, and this does not even take into account the impact of the new government's policies. After the release of this data, Trump raised tariffs on Chinese goods, steel and aluminum, and threatened further increases, which could further increase price pressures.
Although the January employment report showed a 143,000 increase in non-farm payrolls, lower than market expectations. However, Summers pointed out that the data for the previous two months was revised up by 100,000 jobs, and the adjusted data from the Federal Reserve Bank of San Francisco showed that actual new jobs last month exceeded 200,000. Summers said:
This growth rate exceeds the economy's normal absorption capacity, especially given the current tightening of immigration policy, so it is not surprising that wage growth has risen sharply.
The data shows that average hourly wages rose 0.5% in January, higher than all expectations. In addition, Summers mentioned that the University of Michigan's survey also shows that market expectations for inflation are heating up, further exacerbating concerns about upward price risks.
Powell: The Fed Is Not in a Rush to Cut Rates
Summers' view that the Federal Reserve may not cut rates is in line with the statement made by Fed Chair Powell at the Senate hearing yesterday (11th). Powell said that since the US economy is still performing well, the Fed is not in a rush to further cut rates:
"Given that our policy stance is no longer as constrained as it was, and the economy remains strong, we are not currently in a hurry to adjust monetary policy."
Looking ahead, Powell pointed out that if the inflation rate fails to further decline to the target level and the economy remains robust, the Fed may keep interest rates unchanged for a longer period. Conversely, if the labor market unexpectedly weakens or the inflation rate falls to the 2% target faster than expected, the Fed may consider cutting rates.
The difference is that Summers is concerned that wage growth may increase inflationary pressure, while Powell believes that the current US job market is largely balanced and is not the main driver of inflation.
Further Reading: Powell Hawks: The Fed 'Is Not in a Rush to Cut Rates', Bitcoin Briefly Drops Below $95,000, Key Highlights from the Hearing
