Larry Summers Says Fed Should Consider A 50 Basis Point Hike In March, But That Will Likely Depend On... - SPDR S&P 500 (ARCA:SPY)

The market is rooting for the Fed to end its string of rate hikes sooner than later, as evident from the resilience seen in recent sessions. One economist thinks the Fed needs to be flexible with its policy options and remain open-minded

What Happened: The recent robust data points may warrant a reacceleration in the pace of rate hikes at the March meeting of the Federal Open Market Committee, former Treasury Secretary Larry Summers told Bloomberg Friday.

“The Fed right now should have the door wide open to a 50 basis-point move in March,” Summers said. “A reasonable assessment of where the Fed is would say that they have not been this far behind the curve for a year or so.”

The FOMC will meet for a two-day rate-setting meeting on March 21-22 to decide on its next policy move. Fed fund futures are pricing in a 71.6% chance of a 25 basis point move to 4.75%-5% at the meeting, while the odds of a 50 basis point hike are at 28.4%.

Referring to Fed Chair Jerome Powell’s semi-annual monetary policy testimony scheduled for Tuesday and Wednesday, Summers said Powell has an opportunity to reset expectations at the hearings to “address the growing credibility problems that the Fed has.”’

The Fed can wait until Friday to take stock of February’s job market report and the market reaction to it, before baking in a 50 basis point move, the former Treasury official said.

Summers pointed to six data points that belie expectations of a soft landing. These include:

Democrats Influencing Biden On Next Fed Vice Chair? Progressive Democrats’ moves to influence President Joe Biden on the next Fed vice chair did not go down well with Summers.

He noted that Elizabeth Warren (D-MA) was clamoring for Biden to choose a vice chair who can counter Powell. The congresswoman has noted in the past that Powell “has made clear that he will take extreme steps on interest rates, and he’s willing to put millions of people out of work,” Summers said.

The Fed will want to demonstrate its independence in the face of any political pressure, he said. He opined that over time, signs of the “politicization” of the Fed have the potential to push up medium-term inflation expectations, sending longer-term yields and therefore mortgage rates higher.

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Photo by Brookings Institution on Flickr

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