I find that I don’t agree very often with Larry Summers, former Treasury Secretary, about the financial markets. His thinking is just too much “Big Banker” in my opinion.
Which doesn’t mean he’s always wrong, however.
And recently he’s been saying that the June pause in interest rates and a simultaneous increase in the end of the year DotPlot interest rate projections to 5.6% only makes sense if Fed chair Jerome Powell cut a deal with the central bank’s inflation hawks that guarantees a 25 basis point interest rate increase at the July 26 meeting.
Summers points out that the decision on June 14 to “skip” an interest rate increase at that meeting was unanimous. Which was odd enough in itself since before the meeting several voting members of the Fed’s Open Market Committee, the group that sets interest rates, had come out strongly in favor of continuing to raise interest rates at the June meeting.
He also notes that it seems odd that the bank raised its forecast for the end-of-the-year benchmark short-term interest rate by 50 basis points to 5.6%.
The only way this all makes sense to Summers–and I think he’s got a very good point–is if Powell “bought” a unanimous vote on a June skip by promising those at the bank who thought another interest rate increase in June was justified to fight inflation by promising that the Fed would strongly consider resuming interest rate increases at the July 26 and September 20 meetings.
How “strongly”? Well, the increase to a projection of a 5.6% benchmark rate by the end of the year argues for “very strongly.”
And just by the way, the CME FedWatch Tool puts the odds of a 25 basis point interest rate increase at the July meeting at 74.4% on June 21.
