Summers Says Hot Jobs Data Show Neutral Fed Rate ‘Much Higher’

Former Treasury Secretary Lawrence Summers said that the surge in US payrolls in March illustrates that the Federal Reserve is well off in its estimate of where the neutral interest rate is, and cautioned against any move to lower rates in June.

“This was a hot report that suggested that, if anything, the economy is re-accelerating,” Summers said on Bloomberg Television’s Wall Street Week with David Westin. Alongside other factors including an “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.

The neutral rate is the theoretical level for the Fed’s benchmark that neither stimulates nor restrains growth. Fed policymakers last month estimated it at around 2.6% — the median estimate of their forecasts. Summers reiterated his own view is that neutral is 4% or higher. That compares with the current target range of 5.25% to 5.5%.

“There’s a slight element of restriction, but only a slight one” given the Fed’s current rate setting, said Summers, a Harvard University professor and paid contributor to Bloomberg TV.

Earlier this week, Fed Chair Jerome Powell reiterated his skepticism about the idea of using estimates of a neutral rate as a guide for policy. The question of what the neutral rate will be going forward “doesn’t really matter for policy today,” he said in answering questions at a Stanford University event.

Last year, Powell said that it’s possible the short-term neutral rate might be higher than the long-term one, and also that the long-term one itself might be higher, but ultimately the calculation is “unknowable.”

Summers, by contrast, said it’s important to have a guide-post in setting current policy. “There’s no way to judge what policy is without knowing what would be a neutral policy,” he said.