(March 21): Former Treasury Secretary Lawrence Summers said the Federal Reserve’s (Fed) decision to dramatically slow down the shrinkage of its US Treasuries holdings amounts to a worrying signal about market demand for longer-term federal debt.

“This should be getting people’s attention as an alarming development,” Summers said in an interview on Bloomberg Television’s Wall Street Week with David Westin. The move indicated that Fed policymakers determined there was “limited absorption capacity in the markets for long-term bonds,” he said.

The Fed on Wednesday slashed its cap for how much in Treasuries it lets roll off its balance sheet every month to US$5 billion from US$25 billion. While chair Jerome Powell said the trigger for policymakers’ discussion about the issue was related to federal debt-ceiling complications, the decision reflected a broader discussion about the appropriate pace for the quantitative tightening programme.

In a surprise to some observers, Powell gave no indication QT would re-accelerate after Congress addresses the debt limit, which is expected later this year.

Summers, a Harvard University professor and paid contributor to Bloomberg TV, noted that the slowdown in QT comes even after a decline in longer-term Treasury yields. The benchmark 10-year note currently yields around 4.23%, down from 4.81% in mid-January.

Because the Fed creates bank reserves when it buys Treasuries — and those reserves pay interest at an overnight rate — slowing QT also has the effect of shortening the maturity of the collective debt owed by the US public sector compared with what it would otherwise be.

“We are finding it necessary, in order to place debt, to shorten up” the maturity structure of government obligations, Summers said. He suggested the Fed may be worried about a similar situation to what happened in September 2022, when then-UK prime minister Liz Truss’s government triggered a crisis with plans for unfunded tax cuts. The Bank of England had to step into the bond market to avert a meltdown.

“This is Fed policy to contain possible emerging Liz Truss risks — the kind of accident that took place in Britain,” Summers said. “And it’s a reflection of the fact that almost everything we’re hearing on fiscal policy is pointing towards things getting worse, not better.”

Powell, for his part, said the move “isn’t sending a signal in any hidden way that you can try to tease out.”

While the Trump administration has targeted a sharp narrowing in the US fiscal deficit, many economists doubt the impact of the federal spending cuts and tariff hikes that President Donald Trump has prioritised. The budget gap is currently running in excess of 6% of GDP, a figure unprecedented outside of wartime or economic or financial crises.

Summers also blasted Trump for a raft of moves that he said shakes confidence in the rule of law in the US.

Lawsuits have been filed against the administration over actions including deep cuts to staffing, spending and lending at federal agencies set up by Congress, along with its deportations of immigrants and moves to slash transfers to universities.

“We have not crossed a Rubicon yet where court orders are being defied,” Summers said. “We are not there quite yet, but I have to say what was a possible concern two months ago now seems to me to be a genuinely alarming prospect. And that should disturb and worry every investor.”

The former Treasury chief reiterated a call he made last year for private-sector leaders to call out threats to rule of law.

“Leaders in the business and financial community — who know how much they have depended on the rule of law — should be organising to resist what could be an extraordinarily damaging long-term change in policy,” he said.

Uploaded by Siow Chen Ming