Former Treasury Secretary says Fed’s 0.5% rate cut was ‘a mistake’

Former Treasury Secretary Larry Summers believes the Federal Reserve’s jumbo-sized rate cut in September was a mistake, suggesting that policymakers should be more cautious moving forward.
“With the benefit of hindsight, the 50 basis point cut in September was a mistake, though not one of great consequence,” Summers wrote on social media.
Summers’ concern stems from the September nonfarm payrolls report, which showed the U.S. labor market exceeded all expectations by adding 254,000 jobs during the month.
The unemployment rate also fell to 4.1%, while average wages accelerated 4% year over year.
The employment report “confirms suspicions that we are in a high neutral rate environment where responsible monetary policy requires caution in rate cutting,” said Summers.
The “neutral rate” that Summers is referring to is the point at which interest rates neither expand nor restrict economic growth. As Creditnews reported, Summers thinks the Fed vastly underestimated this “neutral rate.”
The Fed currently pegs this neutral rate at around 2.9%, whereas Summers thinks it’s probably higher than 4%.
If Summers is correct, the central bank’s large rate cut last month could induce another bout of inflation, making it harder for officials to engineer the “soft landing” they’ve been talking about for the past few years.
Inflation trending lower, but stickiness remains
While most measures of U.S. inflation have been trending lower in recent months, some categories, like housing and services, remain sticky.
A falling Consumer Price Index (CPI) masks the ongoing housing affordability crisis facing Americans. As Creditnews reported, the shelter component of the CPI increased at double the rate of headline inflation in August.
At 5.2%, shelter costs have risen by at least 5% for 29 consecutive months—the longest stretch of elevated housing inflation in four decades.
For these and other reasons, strategists at BlackRock believe the Fed’s inflation fight is far from over.
“We think inflation will prove sticky and could surprise the Fed again as it did earlier this year,” wrote BlackRock strategists Wei Li, Catherine Kress, and Christian Olinger.
Certain members of the Fed’s policy-setting board share some of BlackRock’s concerns.
Central bank governor Michelle Bowman worries that the Fed’s half-point rate cut “could be interpreted as a premature declaration of victory” over inflation.
In Bowman’s view, the Fed’s inflation fight is far from over.
Bowman has been warning about sticky inflation since the summer when she flagged the national debt, home values, and commodity prices as reasons for higher prices moving forward.
Despite Bowman’s concerns, the Fed has made it clear that interest rates are heading much lower over the next 12 months.
Chicago Fed Bank President Austan Goolsbee told Fox Business last month that, “It’s going to be a lot of cuts” to bring interest rates “down to normal.”
More from Creditnews:
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- This under-the-radar recession indicator just posted its biggest warning in 35 years
- ‘We are in a recession already,’ financial veteran says
- September was the worst month for mortgage applications in 30 years
- A record percentage of Americans believe now is a bad time to buy a home
- The Fed won’t be able to lower rates as much as it wants, says ex-Treasury Secretary