Dragon claws
Former Treasury Secretary Lawrence Summers said it was increasingly likely that neutral interest rates rose because of the economy’s resilient strength against the Federal Reserve’s monetary tightening.
In an interview with Bloomberg, Summers said arguments in favor are emerging neutral rates that remain higher due to fiscal deficits and spending trends less sensitive to the cost of money.
“We have an economy with a lot of underlying strength in interest rates where that would have seemed unlikely some time ago,” he said. “One would imagine that Treasury bond rates (US10Y), (US30Y), (US5Y) will average well above 3% for the remainder of this decade.”
He said he agreed with Treasury Secretary Janet Yellen’s doubts about returning interest rates to pre-Covid levels, which represents a change in his commentary. Last year, Treasury bills in 2030 were 2.4%, according to the White House. At the turn of the century, average bill rates were around 1.5%.
Summers said the January jobs report — which says the U.S. created 353,000 nonfarm payrolls that month — is an indication that “there’s a lot of strength in the economy.”
He added that housing, which is typically an interest-sensitive sector, now makes up a smaller portion of gross domestic product. He also said that durable goods “are less durable” now.
Summers warned of a renewed acceleration in inflation due to the strength of the economy. Fed Chair Jerome Powell also spoke of the risk of price gains stabilizing “at a level significantly above 2%.”