During an interview aired on Friday’s edition of Bloomberg’s “Wall Street Week,” Harvard Professor, economist, Director of the National Economic Council under President Barack Obama, and Treasury Secretary under President Bill Clinton Larry Summers stated that the “huge set of new private sector investments going on with respect to green investments and the IRA” will put upward pressure on interest rates.
Summers said that he can’t understand why the Federal Reserve believes “that the ultimate neutral rate is 2.6 to be bizarre in current circumstances. Here’s what we have relative to a few years ago, when they said it was 2.5: We’ve got fiscal policy in a much, much more expansionary place with much higher deficits, much larger role of debt. That puts pressure on credit markets. We’ve got a huge set of new private sector investments going on with respect to green investments and the IRA going on with respect to resilience and reducing dependence on single sources. We’ve got a potential huge source of demand for chips and for electricity coming out of the AI revolution. And we’ve got a huge wealth effect as markets for both housing and stocks have run way up for the last few years. So, with all of those impulses to demand, I cannot understand why someone would form the view that the neutral rate was essentially the same as they thought it was four years ago. And I think the neutral rate is far more likely to have a four-handle on it right now than it is to have a two-handle on it.”
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