Larry Summers: Fed should impose 1 percent rate hike amid ‘serious inflation problem’

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Former Treasury Secretary Larry Summers suggested the Federal Reserve should consider a full-percentage-point rate hike after August’s inflation report turned worse than expected on Tuesday.

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The August Consumer Price Index showed an increase of 8.3% for headline inflation and 6.3% for core inflation, excluding food and energy prices.

Both numbers came in higher than expected, fueling fears that inflation has remained persistent despite the Fed’s policy-tightening efforts.


“It’s been clear to me for some time now that a 75 basis point increase in September is appropriate,” Summers tweeted. “And, if I had to choose between 100 basis points and 50 basis points in September, I would choose the move of 100 basis points to consolidate credibility.”

A basis point is 1/100th of a percentage point.

According to data from CME Group, investors are pricing in a 28% chance of full-point growth as of Wednesday morning, up from a 0% chance a day earlier. A three-quarter-percentage-point jump is still seen as the most likely, with a 72% chance.

Summers expanded on his review in a Twitter thread, noting the August CPI report that the US has a “serious inflation problem” that will require aggressive action to fix.

Larry Summers has frequently criticized the Fed’s response to inflation.
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Summers said, “Core inflation is higher this month than this quarter, higher this quarter than last, higher in this half of the year than the last one, and higher than last year. “

He said, “With core inflation running above 7 percent this month and looking at the behavior of rents, likely to remain elevated, I’m afraid it’s unlikely that a Fed funds peak rate of around 4% will push inflation to 2 percent.” enough to restore.”

The current fed funds rate is 2.25% to 2.5%. In view of Summers, the Fed will need to implement more sharp hikes after its September meeting next week.

The hike of full percentage points, or 100 basis points, would be the largest of its kind since the Fed began using overnight interest rates to set monetary policy in the early 1990s. bloomberg,

Analysts at Nomura also predicted that the Fed would raise interest rates by a full point, citing “the emergency of a wage-price spiral” and “increasing inflation expectations.”

woman grocery shopping
Larry Summers suggested the Fed should lean into aggressive policy action.
Xinhua News Agency Getty Ima. Through

While many investors are calling for coercive Fed action to tame inflation, others are warning that the central bank is risking “deflation” by continuing to raise rates despite rising fears of a recession.

Jeffrey Gundlach, chief investment officer at DoubleLine Capital, known as the “bond king,” told CNBC that the economy would do better if the Fed raised just a quarter percent. However, he predicted a three-quarter-point increase was the most likely outcome.

“Despite the fact that today’s narrative is quite the opposite, the risk of deflation is much higher today than it was in the past two years,” Gundlach told CNBC,

Meanwhile, Fed Chair Jerome Powell reiterated the bank’s stern stance during a recent speech, saying officials wanted to avoid a “premature lax policy” and were “strongly committed to the project and We will continue this till the work is done.”

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