(June 5): Former US Treasury Secretary Lawrence Summers said he sees higher long-term interest rates over time.

“Markets should be getting used to rates in current ranges for the foreseeable future and probably long rates above current levels,” he said on Tuesday in an Economic Club of New York webinar conducted with former White House chief economist Glenn Hubbard. The yield on the 10-year Treasury note is currently around 4.3%.

Summers, who is now a Harvard University professor as well as a paid Bloomberg contributor, said inflation is not on a “convincing trajectory” to the Federal Reserve’s (Fed) 2% target.

He also argued, as he has before, that the neutral short-term interest rate — the rate which neither spurs nor retards economic growth — is around 4.5%, well above the 2.6% median estimate of Fed policymakers.

“We need to adjust ourselves to a 4 1/2% neutral rate as a reasonable best guess,” he said. “That probably means less Fed cutting than is now anticipated.”

Traders in the federal funds futures market are betting that the central bank will reduce rates by about a half percentage point by the end of the year.

Hubbard, who is now a Columbia University professor, said he broadly agreed with Summers’s assessment. “Inflation at the moment is stuck well above the Fed’s 2% inflation target,” he said.

He also argued, as he has before, that the neutral short-term interest rate — the rate which neither spurs nor retards economic growth — is around 4.5%, well above the 2.6% median estimate of Fed policymakers.

“We need to adjust ourselves to a 4 1/2% neutral rate as a reasonable best guess,” he said. “That probably means less Fed cutting than is now anticipated.”

Traders in the federal funds futures market are betting that the central bank will reduce rates by about a half percentage point by the end of the year.

Hubbard, who is now a Columbia University professor, said he broadly agreed with Summers’s assessment. “Inflation at the moment is stuck well above the Fed’s 2% inflation target,” he said.

He sees the economy slowing in response to the Fed’s efforts to bring down inflation but he does not envisage a “very large recession”.

“I expect a relatively soft landing,” said Hubbard, who served in the Republican administration of former President George W Bush.

Both Hubbard and Democrat Summers voiced concerns about threats to the Fed’s independence, though they disagreed over where they emanated from.

Hubbard saw the risks coming from both President Joe Biden and his challenger, Donald Trump. Summers disagreed, saying the threat from Trump was far greater.

Summers argued that a variety of factors — including Trump’s seeming disrespect of Fed independence, apparent support of a weaker dollar and backing of wide-ranging import tariffs — pointed to significantly higher inflation if the Republican is elected president.

“I find that economic agenda to really be quite alarming in terms of inflation and financial stability,” he said.