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Former U.S. Treasury Secretary Larry Summers was not surprised by the latest hotter-than-expected consumer inflation report, and believes that an interest rate cut in June would be a mistake by the Federal Reserve.
Summers made the remarks in an interview with Bloomberg TV earlier this week on Wednesday in reaction to the consumer price index (CPI) data.
Both headline and core CPI for March increased more than anticipated on a M/M basis. On a Y/Y basis, core CPI moved further away from the Fed’s 2% inflation target. Market participants reacted to the data by rapidly shutting the door on a 25 basis point rate cut at the Fed’s June monetary policy committee meeting.
“I was not hugely surprised by the numbers,” Summers told Bloomberg.
“In an economy that’s growing faster than potential, with an unemployment rate that has a free handle, 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, and that’s what (the CPI) data suggests,” Summers said.
The March CPI report was the fourth straight hotter-than-expected monthly reading, underscoring the sticky nature of inflation. The data suggests that the Fed will be in no rush to ease monetary policy, and Wall Street has suffered as a consequence. The benchmark S&P 500 (SP500) on Friday posted its worst weekly performance since late October last year.
“You have to take seriously the possibility that the next rate move will be upwards rather than downwards and anything could happen. Markets could crash, indicators could turn down,” Summers told Bloomberg.
“But on current facts, a rate cut in June 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 thread on inflation,” Summers added.
According to the CME FedWatch tool, the odds of a 25 basis point cut in June currently stands at about 27%, compared to ~51% a week ago and around 58% a month ago.