Benzinga - by Shanthi Rexaline, Benzinga Editor.
The stock market largely took a stronger-than-expected March job report in stride, but an economist warned on Friday that the data could dampen hopes of rate cuts.
Neutral Rates: The U.S. payrolls gain in March suggests the economy is re-accelerating, said former Treasury Secretary Lawrence Summers in a Bloomberg interview last week. Considering other factors such as the “epic” loosening in financial conditions, “it seems to me the evidence is overwhelming that the neutral rate is far higher than the Fed supposes,” he said.
A neutral monetary policy rate is one which is neither stimulatory nor restrictive to growth.
The median estimate for the neutral policy rate issued by Fed officials following the March meeting was 2.6%, while Summers estimated it be at 4% or higher. The Fed funds rate is currently at a 22-year high of 5.25%-5.50%. Summers, a professor at Harvard University, suggested that the current policy rate has only a slight element of restriction.
The economist also took exception to not having a neutral rate target.
“Saying ‘we don't need to know what the neutral rate is’ is like saying you should drive your car on feel, without looking at the speedometer … It is just a mistake,” he said.
The Bloomberg report noted that Federal Reserve Chair Jerome Powell said at a Stanford University event recently that the question of what the neutral rate will be going forward doesn’t matter for policy today.
Summers, however, said, “There's no way to judge what policy is without knowing what would be a neutral policy.”
Rate Outlook: Delving into the monetary policy trajectory, Summers said, “I don't want to make a prescription for monetary policy in June, but on current facts and current trends, I think it would be an inappropriate act to cut rates” at that meeting.
"My best guess is that the right thing to do is going to be to stick where we are for considerably longer than the Fed dot-plot supposes,” the economist said, adding that while it's “certainly more likely than not that the next move will be down and should be down” in rates, there's still “a real possibility that it should be up.”
The probability of a rate cut, going by the CME FedWatch tool, is 4.8% at the May meeting, 53.2% at the June meeting, 72.5% at the July meeting.
The financial markets have priced in about three cuts this year, with some bullish analysts even flagging more than three, premising their expectation on inflation resuming its downtrend.
The iShares TIPS Bond ETF (NYSE:TIP), an ETF tracking the investment results of an index composed of inflation-protected U.S. Treasury bonds, ended Friday’s session unchanged at $106.68, according to Benzinga Pro data.
Read Next: Larry Summers Says Next Fed Move Could Be Up Rather Than Down As Inflation Data Calls Into Question The ‘Soft-Landing Paradigm’
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