Former U.S. Treasury Secretary Lawrence Summers said inflation could prevent the Federal Reserve from cutting interest rates as much as expected in the coming years.

"If the Fed's monetary policy is as aggressive as they think it is, then the risk of higher inflation is quite large," Summers said on the show.

In their latest forecasts for their benchmark rate, Fed policymakers projected a median rate of 3.4% at the end of next year — meaning the Fed could cut rates by an additional 150 basis points on top of the 50 basis point cut it announced Thursday.

The Harvard professor said that if inflationary pressures re-emerge, "then interest rates will not fall as much as officials predict in their so-called 'dot plot'".

He warned that investors are also overestimating how much the Federal Reserve will ease monetary policy in the future. "I suspect that there will be some upward movement in long-term bond yields - probably a fairly large upward movement in the 10-year Treasury yield or the 30-year Treasury yield," he said.

Currently, the 10-year Treasury yield is around 3.73%, well below last year's high of more than 5%. Summers pointed out that rising yields will push up U.S. mortgage rates over time. Falling mortgage costs have only recently begun to boost demand for home loans, raising hopes for a recovery in the real estate industry.

“The mortgage rates people are looking at now are likely to be relatively low compared to what they will be on average over the next five years,” Summers said.

The 30-year fixed-rate mortgage rate was about 6.15% last week, down from 6.78% at the beginning of the year, according to the Mortgage Bankers Association. In the five years before the pandemic, the average rate was about 4.2%.

Summers reiterated his view that the Fed has underestimated the neutral interest rate, the rate at which policymakers believe it is consistent with maintaining 2% inflation.

Fed officials raised their neutral rate forecast in their latest projections Thursday to a median of 2.875%. Fed Chairman Jerome Powell said at a news conference that the neutral rate "is likely to be much higher than it was in the years before the pandemic," when trillions of dollars of government bonds around the world were yielding negative yields.

Powell said, “We don’t know” what the neutral rate will be. “We can only know by observing the results,” he said, adding that if the Fed sets policy below the neutral rate, it will see inflation rise.

Summers said higher fiscal borrowing and big investments in areas such as renewable energy and artificial intelligence suggested the neutral rate was at least 4%.

The article is forwarded from: Jinshi Data