Fed policy isn't very tight and the market is 'at the foothills of bubbles,' former Treasury Secretary Larry Summers says

Markets are edging closer to bubble territory, Larry Summers warned.
The former Treasury Secretary warned Fed policy isn't nearly as restrictive as markets think.
That's raising the odds of no rate cuts coming in 2024, summers said.

The Federal Reserve hasn't tightened monetary policy as much as investors may think, and that's putting the market more at risk of entering bubble territory, according to former Treasury Secretary Larry Summers.

Speaking to Bloomberg on Saturday, Summers pointed to the strength of the US economy, with hiring still strong and growth staying resilient. That's surprised Wall Street titans like Jamie Dimon and Ray Dalio, who had previously been calling for a recession as the Fed embarked on its campaign to tackle inflation.

But a strong economy could actually spell bad news for stocks, as it suggests the Fed's monetary policy isn't nearly as tight as markets think, Summers said.

Central bankers have raised interest rates 525 basis points to combat inflation, but the neutral interest rate, a hypothetical interest rate level that neither hurts nor hinders economic growth, has nearly doubled from around 2.5% to 4%, Summers estimated.

"I think that's going to be there with us for the next while," Summers said of higher interest rates. "The Fed may end up not deciding to cut quite as much as markets are now expecting," he warned.

That markets could wind up disappointed later this year, with investors eagerly anticipating aggressive Fed rate cuts to come in 2024. Markets are now pricing a 57% chance the Fed could cut rates by 100 basis points or more by the end of the year, according to the CME FedWatch tool.

But the odds of no Fed rate cuts coming in 2024 have likely increased to slightly higher than 15%, Summers warned, which is likely to be bearish for stocks.

Stocks could also be showing early signs of trouble, given that monetary policy isn't as restrictive as markets think. The S&P 500 has closed in on a series of all-time highs in 2024, a winning streak market experts have warned isn't sustainable.

"We're at least at the foothills of bubbles," Summers said. "I don't think now that financial markets have the kind of bubbly characteristics that they famously had at other times. But it's not that we're a million miles away from that either," he said.

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