January’s data emphasizes how robust the U.S. economy—and, by extension, inflation— continues to be, in spite of the steep interest rate hikes imposed by the Fed since almost a year ago, increasing the risk “that we’re going to [have to] hit the brakes very, very hard,” former U.S. Treasury Secretary Larry Summers told Bloomberg Television, according to an article in Barron’s that cites the interview. Demand is still very strong, which could mean that “we’re not landing at a terminal rate” within the next several months or so, Summers says, and policy makers may be forced to taken even more drastic measures.
The markets have indicated that traders and investors are starting to reevaluate their expectations that the Fed would hike rates up a few more times before slashing them once again. As fed funds futures traders factor in the likely possibility that there will be a half-percentage rate increase next month, yields on 2-year and 10-year Treasury notes advanced once again for the fourth week straight. And while the ICE U.S. Dollar Index climbed to its highest level in 6 weeks, U.S. stocks finished last week lower, the article reports.
In late 2021, Summers warned about the growing inflation risk—a prediction that mostly came true, making his forecasts closely watched. Last month he voiced his doubt that the U.S. would find its way back to a low-interest-rate environment. “The Fed’s been trying to put the brakes on, and it doesn’t look like the brakes [have] much traction,” he said at the time, elaborating that “[y]ou can be moving too fast, that’s the inflation pressure, and you can be setting yourself up for some kind of crash…both of those things are real risks in this environment.”