Former Treasury Secretary Lawrence Summers said that bond-market pricing doesn’t amount to a judgment call on what the Federal Reserve ought to do with interest rates, and that it would be a “very serious error” for policymakers to ease next week.
“It would have been a grave mistake to have eased already, and would be a very serious error to ease at this upcoming meeting,” Summers said on Bloomberg Television’s Wall Street Week with David Westin. A cut on May 7 would undermine confidence in the Fed’s determination to bring down inflation, causing longer-term borrowing costs to climb, he said.
Fed Chair Jerome Powell and his colleagues are widely expected to stand pat at the meeting next week, with inflation still running above their 2% target and price pressures looming from President Donald Trump’s tariff hikes. Trump has repeatedly criticized Powell for not having moved this year, arguing that declines in energy and other prices justify lowering rates.
Earlier Thursday, Treasury Secretary Scott Bessent highlighted that two-year Treasury yields are below the Fed’s overnight benchmark rate. “So that’s a market signal that they think the Fed should be cutting,” Bessent said in an interview with Fox Business.
“It’s pretty analytically unsound to reason from the two-year to what the Fed should do,” said Summers, a Harvard University professor and paid contributor to Bloomberg TV. “I haven’t studied Secretary Bessent’s comments closely, but if he was making comments that could reasonably be interpreted as being prescriptive with respect to the Fed, that seems like a quite unusual choice for a Treasury secretary — and a problematic choice as well.”
Presidential Comparison
Bessent reiterated in his appearance that he and the president are focused on 10-year Treasury yields — “targeting that point on the curve.” Even so, Trump has continued to blast Powell.
“The president’s advice is really misguided,” both because the Fed won’t listen and because the political pressure boosts long-term interest rates, Summers said. “In many ways, it’s actually worse” for the Treasury secretary to comment on the Fed, he added.
“People understand that presidents are political figures who are called on to address all issues, — whereas they think of secretaries of the Treasury as sophisticated financial professionals who should know all about the independence of the Fed,” Summers said.
Two-year yields were around 3.70% as of 1:57 p.m. in New York, against an effective federal funds rate of 4.33%. The Fed currently targets the federal funds rate at a range of 4.25% to 4.5%. Ten-year yields were around 4.23%, down from above 4.5% before Trump took office.
Neil Dutta, head of economic research at Renaissance Macro Research, wrote in a brief note to clients after Bessent’s remarks that “the Treasury secretary knows how to feel the market. Wage and salary growth is running below the level of the fed funds rate as well. That’s a sign that past policy has already been too tight.”
Summers said that “I wouldn’t argue with the market’s judgment that the full set of developments in the economy points towards more easing than looked like it would be necessary a month or two ago.” The economy “probably looks softer today” than a couple months back he said, while also noting “troubling signs” of inflation risk.