Former Treasury Secretary Lawrence Summers said the Fed may need to raise rates at least once more, and warned that not enough attention has been paid to the impact on the U.S. fiscal deficit.

“My best guess is that the Fed will need to raise rates further,” Summers said on Bloomberg Television. wall street weekly with David Westin. He said there was now a modest slowdown “in the making” of the economy, with some estimates pointing to growth of more than 5% in the current quarter.

Summers applauded Fed Chairman Jerome Powell’s speech Friday in Jackson Hole, Wyoming, in which he said the central bank was ready to keep raising rates as needed to ensure a sustained decline in inflation to policymakers’ setting 2% target. He added that Powell’s comments suggested the Fed was open to the possibility of: neutral rate — the level that neither stimulates nor constrains the economy — may be higher than before.

In his speech, the chairman of the Federal Reserve pointed out that the current interest rate setting ceiling is 5.5%, which is higher than the “mainstream” neutral expectation. But he said the inability to determine the neutral rate cast doubt on the “precise extent of monetary policy constraints”.

While not explicitly acknowledging that the neutral rate is higher, Powell “pointed out that the rate of increase is much faster than many people expected given the extent to which rates have been pushed higher,” Summers, a Harvard University professor and Bloomberg TV paid contributor, said. many”. “I think it will reinforce the growing sense in the market” that the Fed is restoring its credibility to fight inflation, he said.

U.S. Treasury yields have climbed in recent weeks as investors react to resilient economic data and increased demand for federal government borrowing. The 10-year Treasury yield hit its highest level since 2007 this week. Interest rate futures showed that expectations for how much the Fed will cut rates next year have eased.

“My guess is that over the next couple of months, you’ll probably see the fed funds rate have to go up once, if not more,” Summers said of the Fed’s benchmark rate.

Summers also said he would like to see Powell do more to recognize the impact of “the country’s problematic fiscal position” on monetary policy.

“A sharp increase in the government’s budget deficit implies a substantial increase in the absorption of savings” and a boost in demand, he said. “All of this means that the neutral rate will rise – and it will rise now and in the future.”

The U.S. Treasury Department said earlier this month that it expects to borrow a net $1 trillion During the quarter, issuance of long-term securities is expected to increase in the coming quarters.

Summers emphasized that the increase in supply comes as the Fed continues to reduce its holdings of U.S. Treasuries through its so-called quantitative tightening program. Another factor, he said, is the likely reduction in foreign demand for U.S. government debt, especially from Japan, which is now considering moving away from monetary easing.

The former Treasury secretary reiterated his view: “I expect the 10-year rate to stabilize” somewhere above current levels for the next few years. “

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