The Federal Reserve is under fire: It should not s

Former U.S. Treasury Secretary Lawrence Summers criticized the Federal Reserve for continuing to send signals that it is ready to cut interest rates in the coming months even as the U.S. economy is strong and inflation expectations remain too high.

Summers told Bloomberg TV’s “Wall Street Week”:

"My sense is that the Fed is still eager to start cutting rates, but I don't fully understand it. I don't know why we're so eager to talk about accelerating rate cuts, given how the economy and financial markets are doing."

Summers' speech came a day after policymakers updated their forecasts for the Fed's benchmark interest rate, with the median forecast continuing to point to three rate cuts this year. Federal Reserve Chairman Jerome Powell said that while "we don't want to ignore" higher-than-expected inflation data in January and February, they "do not really change the overall picture of waning price pressures."

Summers, now a professor at Harvard University and a paid contributor to Bloomberg, said a key problem remains that the Fed's estimate of the neutral policy rate - the level of interest rates that neither stimulates nor slows the economy - is too low. This distortion means that policymakers believe their current environment is more restrictive than it actually is, he said.

"If you don't know what the neutral rate is, you don't know whether your policy is accommodative or restrictive," Summers said.

Although the median long-term forecast for the benchmark interest rate released on Wednesday was raised to 2.6% from 2.5%, Summers reiterated that the true number is more likely to be at least 4%. By comparison, the Fed's current target range is 5.25% to 5.5%.

U.S. financial conditions are loose

"I'm not sure how restrictive monetary policy is, and the real proof is in the actual results," Summers said. He said that since the Fed started raising interest rates two years ago, "monetary policy has been a long way from this point." "Time" is playing out, but "the economy remains surprisingly elevated" and the unemployment rate is below what the Fed considers to be full employment. Policymakers' long-term forecast for the unemployment rate is 4.1%. The index was 3.9% in February.

At the same time, the former Treasury secretary emphasized that policymakers expect inflation to exceed the Fed's 2% target this year and next. Summers said U.S. economic growth is also exceeding long-term potential, financial conditions are "at very accommodative levels," and "credit spreads are flashing green and are accommodative."

Article forwarded from: Golden Ten Data

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