(Bloomberg) — Former U.S. Treasury Secretary Lawrence Summers said he expects higher long-term interest rates over time.
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“Markets should adjust to interest rates at current levels for the foreseeable future and likely to long-term interest rates above current levels,” he said Tuesday in an Economic Club of New York webinar with former chief economist Glenn Hubbard of the White House. The yield on 10-year government bonds is currently around 4.3%.
Summers, who is now a professor at Harvard University and a paid contributor to Bloomberg, said inflation is not on a “convincing trajectory” toward the Federal Reserve’s 2% target.
He also argued, as he has done before, that the neutral short-term rate – the rate that does not stimulate or slow economic growth – is around 4.5%, well above the average estimate of 2.6% by policymakers the Fed.
“We should adjust ourselves to a neutral rate of 4 1/2% as a reasonable best estimate,” he said. “That likely means fewer Fed cuts than currently expected.”
Traders in the federal funds futures market are betting that the central bank will cut rates by about half a percentage point by the end of the year.
Hubbard, who is now a professor at Columbia University, said he broadly agreed with Summers’ assessment. “Inflation is currently well above the Fed’s inflation target of 2%,” he said.
He sees the economy slowing in response to the Fed’s efforts to reduce inflation, but he does not foresee a “very big recession.”
“I expect a relatively soft landing,” said Hubbard, who served in the Republican administration of former President George W. Bush.
Both Hubbard and Democrat Summers expressed concern about threats to the Fed’s independence, although they disagreed on where they came from.
Hubbard saw the risks coming from both President Joe Biden and his challenger, Donald Trump. Summers disagreed, saying the threat from Trump was much greater.
Summers argued that a variety of factors — including Trump’s apparent lack of respect for the Fed’s independence, clear support for a weaker dollar and support for broad tariffs — pointed to significantly higher inflation if the Republican were to become president. are chosen.
“I think that economic agenda is really quite alarming in terms of inflation and financial stability,” he said.
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