Larry Summers: Interest Rates Likely to Go Up More than Expected

The Federal Reserve will most likely need to increase interest rates more than markets are currently expecting due to persistent high inflationary pressures, former Treasury Secretary Larry Summers told Bloomberg Television's "Wall Street Week" over the weekend.

"We have a long way to go to get inflation down" to the Fed's target, Summers said, adding, "I suspect [Fed policymakers are] going to need more increases in interest rates than the market is now judging or than they're now saying."

Traders expect the Fed to boost rates to about 5% by May, but Summer said that "6 [percent] is certainly a scenario we can write," emphasizing "that tells me that 5 is not a good best-guess."

Summers made the comments soon after the U.S. monthly jobs report registered an unexpected rise in average hourly earnings gains, figures which point to continuing strong price pressures in the economy.

Summers stressed to Bloomberg, "For my money, the best single measure of core underlying inflation is to look at wages. My sense is that inflation is going to be a little more sustained than what people are looking for."

Even though several U.S. indicators have shown limited impact so far from the Fed's tightening campaign, Summers warned that change usually occurs suddenly.

"There are all these mechanisms that kick in," he said. "At a certain point, consumers run out of their savings, and then you have a Wile E. Coyote kind of moment," referring to the cartoon character that falls off a cliff.

Summers gave as an example the housing market, where there is often a sudden rush of people trying to sell when prices start to fall, emphasizing that "at a certain point, you see credit drying up," forcing repayment difficulties.

"Once you get into a negative situation, there's an avalanche aspect — and I think we have a real risk that that's going to happen at some point," Summers said. "I don't know when [the downturn is] going to come, but when it kicks in, I suspect it'll be fairly forceful."

The former Treasury chief also warned that "this is going to be a relatively high-interest-rate recession, not like the low-interest-rate recessions we've seen in the past."