Stubbornly high inflation could force the Federal Reserve to aggressively raise interest rates above 6%, the highest in more than two decades, according to former Treasury Secretary Larry Summers.
The US central bank has embarked on one of the fastest routes in history to raise borrowing costs and slow down the economy. Policymakers have already raised the benchmark federal funds rate from near zero in March to a range of 3.75% to 4%, the highest since the 2008 financial crisis.
Despite higher interest rates, inflation is still near a 40-year high, with the Labor Department reporting that the consumer price index rose 8.3% in September on a annualized.
The relentless rise in consumer prices may ultimately leave the Fed with no choice but to raise interest rates above the maximum expected rate of 4.6% next year, Summers said during a briefing. an interview on Bloomberg TV.
“It wouldn’t surprise me if the terminal rate hit 6% or more,” Summers said.
Interest rates haven’t been this high since the early 2000s.
Summers, a Harvard University professor who served in the Clinton and Obama administrations, has repeatedly sounded the alarm about rising inflation and has spent much of 2021 arguing that the The Biden Teamas well as policymakers at the Federal Reserve, underestimated the risk of soaring consumer prices.
He warned last month that history indicated inflation would be slower to come down than Fed officials expected.
Officials approved a sixth consecutive interest rate hike – and the fourth consecutive increase of 75 basis points – during their two day meeting last week after September’s inflation report warmer than expected. At a press conference after the meeting, Chairman Jerome Powell signaled that the Fed had no plans to halt tightening any time soon.
“We still have a ways to go,” Powell said. “And incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than expected.”
The Fed’s efforts to cool the economy and bring inflation closer to its 2% target is the most aggressive tightening campaign since the 1980s.
But the anti-inflation campaign has potential risk of recessionand a growing number of Wall Street economists and firms are forecasting a slowdown this year or next as the Fed tries to make the connection between fighting inflation without crushing growth.
“The good news is that the economy looks robust,” Summers said. “The bad news is that there’s not a lot of evidence that inflation is under control yet.”