Larry Summers says the new inflation data won't derail the Fed from a jumbo interest rate hike in September
- Larry Summers said the US inflation data due Tuesday won't deter the Fed from aggressive interest rate hikes.
- Investors are expecting an "appropriate" 75 basis point raise, the former Treasury Secretary said.
Larry Summers has said he doesn't believe the fresh US inflation data due Tuesday will deter the Federal Reserve from staying aggressive with its interest-rate hikes.
The former Treasury Secretary told Bloomberg TV he's watching the August consumer price index report for signs of a cooling in rents and housing.
But he doesn't believe the new CPI reading will have any impact on the central bank's commitment to keep hiking interest rates to push the red-hot inflation rippling through the US economy down to its 2% target.
"Frankly, I don't think that number is going to change where the Fed is in the near-term, which is headed for 75 basis points," Summers told Bloomberg on Monday.
The Fed tracks the CPI as its preferred measure of inflation. Usually, any sign the rate is falling would be interpreted as a reason for the central bank to take a softer stance on interest rate increases.
But its policymakers have been guiding since last week that even if the inflation data is better than expected, a third consecutive 75 basis point hike is likely. Richard Clarida, former vice chair of the Fed, said last week the Fed will raise rates to 4% "come hell or high water" , as failure to beat inflation is not an option.
Given that, the market is pricing in a near certainty of a third consecutive jumbo raise at the Fed's September 20-21 meeting.
"That's what the market is judging, and I have to say it's appropriate given the strong signals that chairman Powell is sending," Summers said.
In recent days, market commentators have been weighing whether US inflation has peaked, and economists expect headline inflation to come in at 8.1%, down from July's 8.5% print. That would be the first month-on-month fall since May 2020.
If CPI is lower than expected, investors should expect a "knee-jerk" gain in the stock markets, according to analysts.
While falling gas prices are expected to help pull August's inflation rate lower, economists like Paul Krugman also see a cooldown in the cost of rent as potentially acting as a curb on core inflation.
"I'll be looking to see whether there's yet been any de-escalation in the rental and the housing components of that index," Summers said.
Longer term, Summers said he'll be studying recent US census data for what they say about life expectancy for Americans in the wake of the COVID-19 pandemic.
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