The dismal start to financial markets this year, coupled with concerns about the slowdown in China, should keep the Federal Reserve from raising interest rates four times in 2016, as policymakers had forecast last month, former Clinton administration Treasury Secretary Larry Summers said Monday.
Summers also warned on CNBC’s “Squawk Box” that psychology in volatile markets can change quickly. “Just as I thought it was a mistake to overreact to bits of strength in the middle of last fall, there’s also a danger to overreacting to the weakness at present,” he said.
The Fed raised rates in December for the first time in more than nine years . At the time, central bankers projected four more rate hikes in 2016, but the new year market turmoil has scaled back those expectations.
“I’ve thought consistently that it was not a confident bet that the economy could withstand four rate increases this year, and continue to growth robustly and continue to provide support for a very weak global economy,” Summers said. “Certainly the way markets have moved this year has done nothing but support the view.”
“The markets have never believed the Fed on the Fed’s expansion [on rates],” he argued. “I think the Fed has quite been very unwise when it has criticized markets for not believing it because … markets reflect the collective judgment of a number of people. It seems to me there was substantial grounds for concern.”