Ahead Of Next Week’s Fed Meeting, Larry Summers Says ‘Overwhelming Evidence’ Supporting Rate Cuts Not Yet There, Advises Central Bank To Be ‘Very Deliberative And Careful’ – SPDR S&P 500 (ARCA:SPY)

Former Treasury Secretary Larry Summers has cautioned the Federal Reserve about the potential consequences of a sudden policy shift. Summers, speaking in an interview with Bloomberg, stated that the moment the Fed announces any changes to its current stance, it will have significant implications for the financial markets.

Summers urged the central bank to exercise caution and deliberation before making any decisions. He highlighted the importance of waiting for overwhelming evidence of low inflation or a downturn in the economy before adjusting monetary policy. According to Summers, neither of these conditions is currently present.

The economist also commented on the recent November non-farm payrolls report, which indicated a robust economy last month. The report showed that 199,000 jobs were added, surpassing October’s figures and consensus expectations. Additionally, the average hourly earnings increased by 0.4%, higher than anticipated. Summers believes this data strengthens the argument for careful consideration of declaring victory in the battle against inflation. He emphasized the need to remain mindful of possible supply shocks and other adverse developments.

While Summers acknowledged the possibility of a soft landing for the economy, he cautioned against taking this scenario for granted. It would be a mistake to assume that a smooth transition is guaranteed.

The financial markets have rebounded recently, driven by expectations of potential rate cuts by the Fed in 2024. The S&P 500 index reached its highest level for the year on an intraday basis last Friday. The SPDR S&P 500 ETF Trust (SPY), which tracks the performance of the S&P 500 Index, has gained approximately 22% so far this year.

The Federal Open Market Committee (FOMC) is scheduled to begin a two-day meeting on Tuesday. The FOMC will release a post-meeting policy statement, including its summary of economic projections, on Wednesday. This statement will also include the dot-plot chart, which reflects each Fed official’s expectations regarding the future interest rate trajectory. Fed Chair Jerome Powell will hold a press conference to explain the rate decision and provide insights into the near-term monetary policy direction.

The futures market currently indicates a 97.1% probability of an interest rate pause at the current level of 5.25% to 5.50%. However, if the Fed’s language and Powell’s comments do not suggest rate cuts by mid-2023, the market could experience a reversal of risky bets.

Summers’ cautionary remarks serve as a reminder that a prudent and measured approach is necessary when considering changes to monetary policy. The Fed’s decision will undoubtedly have far-reaching consequences, and it is crucial to carefully assess the state of the economy and inflation before making any adjustments.