Summers Rebuts Bassett: Judging Federal Reserve Actions from Market Pricing is Inaccurate, Rate Cut Next Week Would Be a Major Mistake
Former U.S. Treasury Secretary Lawrence Summers stated that the pricing in the bond market does not equate to a judgment on how the Federal Reserve should adjust interest rates, and that if policymakers loosen policy at next week's meeting, it would be a "very serious mistake."
The market generally expects Federal Reserve Chairman Powell and his colleagues to remain steady at next week's meeting, as inflation remains above the 2% target, and President Trump's tariff measures have put price pressure on the economy. Trump has repeatedly criticized Powell for not taking action this year, citing the decline in prices of energy and others as justification for a rate cut.
Earlier on Thursday, Treasury Secretary Bassett emphasized that the two-year Treasury yield has fallen below the Federal Reserve's overnight benchmark rate. "This indicates that the market believes the Federal Reserve should cut rates," Bassett said in an interview with Fox Business Channel.
"Inferring what actions the Federal Reserve should take based on the two-year Treasury yield is not logically sound," Summers stated. "I have not closely analyzed Bassett's remarks, but if his statements can be reasonably interpreted as concrete suggestions for Federal Reserve policy, it seems like an extremely unusual choice and a problematic one for a Treasury Secretary."
Bassett also reiterated on the same occasion that he and Trump are focusing on the 10-year Treasury yield, stating, "Targeting that point on the yield curve."
Neil Dutta, head of economic research at Renaissance Macro Research, wrote in a brief report sent to clients after Bassett's speech: "The Treasury Secretary understands how to gauge the market. Wage and salary growth is currently also below the federal funds rate level. This indicates that past policies have been too tight."
Summers stated: "I would not argue with the market's judgment, as the overall trend of economic development suggests that the degree of easing currently required may be higher than what was deemed necessary a month or two ago." He pointed out that the current economic conditions may be weaker than a few months ago, while also mentioning that inflation risks are showing "disturbing signs."
