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Former Treasury Secretary Larry Summers cautioned investors about prematurely celebrating a cooling down of inflation amid the recent stock market rally — spurred by anticipation the Federal Reserve will cut interest rates in 2024.
“I think there’s still a risk that the market is probably underestimating: that we’re not going to quite make as much progress on inflation as people hope and that there’s not going to be quite as much room for Fed easing as people hope,” Summers told Bloomberg Television.
The markets have been on a tear in recent weeks. After a rough 2022, the S&P 500 was up 24% this year while the Dow Jones Industrial Average ended 2023 up 13%.
The tech-heavy Nasdaq index will ring in the new year having gained a whopping 44% compared to Jan. 1.
The excitement on Wall Street is fueled by expectations that the Fed is done hiking interest rates in light of recent data indicating that the rate of inflation has cooled somewhat.
But Summers warned on Thursday that inflationary pressures such as labor unrest, tight labor markets, and geopolitical turmoil remain.
Summers has been criticized for predicting that inflation could only be tamed by pushing up unemployment — which remains at record low levels.
Nonetheless, Summers isn’t ready to concede that the US is on the verge of a “soft landing” — a reining in of inflation without the need for mass layoffs in the job market or a recession.
“To declare that proverbial ‘soft landing’ to have taken place seems to me to be premature,” Summers told Bloomberg.
“I’d certainly say it looks better and more likely than it did six or eight months ago. I always said that soft landings were the triumph of hope over experience, but occasionally hope may triumph over experience.”
Summers told Bloomberg that the prospect of global conflict means that the US may have to ramp up defense spending.
“The way in which the United States has conceived itself in terms of national security is no longer viable. We are going to have to invest substantially more in all aspects of national security,” he said.
Earlier this month, US central bankers voted to hold its key interest rate steady for the third consecutive time — keeping the benchmark borrowing rate between 5.25% and 5.5%.
The Fed has been forced to hike interest rates 11 times in the last two years in an effort to tame runaway inflation.
The Consumer Price Index showed inflation rose 3.1% in November, the lowest reading since June, but still stubbornly above the Fed’s 2% long-term target for prices.
Optimism for imminent cuts cooled earlier this month after New York Federal Reserve President John Williams and Atlanta Fed President Raphael Bostic each indicated that talk of bringing down rates was premature.