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History Shows No Example of Hiking US Rates Too Fast, Summers Says


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History Shows No Example of Hiking US Rates Too Fast, Summers Says

(Bloomberg) — Former Treasury Secretary Lawrence Summers argued against the Federal Reserve holding back from aggressive monetary tightening, saying that greater economic damage would result from any hesitation.

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“History records many, many instances when policy adjustments to inflation were excessively delayed and there were very substantial costs to that,” Summers told Bloomberg Television’s “Wall Street Week” with David Westin. “I am aware of no major example in which the central bank reacted with excessive speed to inflation and a large cost was paid.”

Summers highlighted that even Paul Volcker, who famously vanquished elevated inflation as Fed chair, “had a kind of false start,” as recounted in a recent opinion piece by former Fed Governor Frederic Mishkin. In response to weakening economic data, Volcker relaxed the Fed’s stance in the spring of 1980, “which then had to be reversed” later, generating higher interest rates than would otherwise have been needed, he said.

“We’ve got a substantial underlying inflation problem — that doesn’t come out without very substantial monetary policy adjustment,” said Summers, a Harvard University professor and paid contributor to Bloomberg Television. “And the market is waking up to that fact.”

Terminal Rate

The S&P 500 Index slid again on Friday, bringing the week’s retreat as of midday to more than 5%, as the bond market ratcheted up expectations for Fed rate increases. Two-year Treasury yields have jumped about 32 basis points this week, to 3.88% as of 12:07 p.m. in New York.

Chair Jerome Powell and his colleagues are forecast by economists to boost their benchmark rate by 75 basis points next week, taking the top of the target range to 3.25%. Interest-rate futures suggest that policy makers will take it toward 4.5% by spring 2023.

“We’re more likely to end up above 4 1/2 than we are to end up below 4 1/2, and it certainly wouldn’t surprise me if that rate has to get above 5,” Summers said. “Whether the Fed is going to stay the course and do what’s necessary to contain inflation, we’re going to have to see how that plays down the road.”

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GLOBAL MARKETS-Stocks fall, 2-year yields soar with rates, economy in focus

Wall Street indexes followed European stocks lower on Friday and short-dated Treasury yields soared while the dollar rose as investors braced for a U.S. interest rate hike next week and grew alarmed at signs of a global economic slowdown. Souring the mood was a warning from FedEx Corp late on Thursday that a global demand slowdown accelerated at the end of August and was on pace to worsen in the November quarter, causing it to withdraw its financial forecasts. The FedEx warning “set the tone for people being forced to take on board what they had been reluctant to take on board all along – that rates will be higher for longer,” said Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA.


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Wall Street indexes were firmly in the red after a choppy start to Thursday’s session while bond yields rose as investors digested economic data that provided the Federal Reserve little reason to ease its aggressive interest rate hiking cycle. Oil futures tumbled more than 3% on demand concerns and after a tentative agreement that would avert a U.S. rail strike, as well as continued U.S. dollar strength with expectations for a large U.S. rate increase.

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