The Fed will spark a 'seismic moment' if it cuts rates, and should wait for overwhelming evidence the economy is slowing, Larry Summers says

larry summers
REUTERS/Jonathan Ernst
  • Markets are ramping up expectations for the Fed to cut interest rates in 2024, but Larry Summers remains cautious.

  • The former Treasury Secretary said Friday the jobs data was promising, but he's not confident in a no-recession outcome.

  • The Fed should wait until it has "overwhelming evidence" of cooling inflation or a slowing economy before cutting rates, he said.

Even after a hot November jobs report, markets think the Federal Reserve is heading for interest rate cuts as early as March 2024. But after the data release Friday, former Treasury Secretary Larry Summers cautioned that policymakers should tread carefully before making a final decision.

Sharing comments on Bloomberg Television, Summers said the central bank should wait for more convincing data ahead of any potential rate cuts.

"The moment they turn, or announce they're going to turn, is going to be a seismic moment," said Summers, who is also a Harvard professor and paid contributor for Bloomberg Television. "And for that reason, they probably need to be very deliberative and careful about getting to that point."

Inflation has cooled from above 9% last summer but remains above the Fed's 2% target, and the labor market continues to show signs of loosening. Jerome Powell and Fed officials have recently sent mixed signals as far as what's next for monetary policy, but according to CME's Fed Watch Tool, traders see a 47% likelihood for an interest rate cut in March.

A month ago, that number hovered at about 18%.

The Labor Department said Friday nonfarm payrolls climbed by a seasonally adjusted 199,000 in November, above the 190,000 forecast by Dow Jones. Plus, unemployment fell to 3.7% from 3.9%, and labor force participation ticked up to 62.8%.

The report was "good," according to Summers, and they showed that the economy remains robust. However, the acceleration of wages, in his view, raises reason for concern whether the war on inflation is actually over.

The Fed should hold off on interest rate adjustments "until they see some overwhelming evidence of inflation being locked in low, or see some real evidence of the economy turning over," Summers maintained.

On Tuesday, meanwhile, the Bureau of Labor Statistics' Job Openings and Labor Turnover survey showed more signs of a cooling labor market, with the number of job openings falling from a downwardly revised 9.4 million job openings in September to 8.7 million in October.

That was below consensus estimates, and the lowest mark since early 2021.

Neil Dutta, the head of economic research at Renaissance Macro, said that the labor market is not the primary driver of monetary policy currently.

"Indeed, there is an asymmetry in the Fed's policy reaction function: stronger employment will not push them away from a cut as much as weaker inflation will push them towards one," Dutta wrote in a note Friday. "The solid economy puts a ceiling on how many cuts we'll get, but it will not stop cuts altogether. That's what a recalibration of policy is about."

ING economists said they expect the Fed to slash rates six times next year, while Barclays has predicted four cuts.

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