Summers refutes Bessen: The Federal Reserve's decisions cannot rely on market pricing; a rate cut next week would be a serious mistake

On Thursday, former U.S. Treasury Secretary Larry Summers, a prominent figure warning against high inflation, stated that the pricing in the bond market does not equate to a judgment on whether the Federal Reserve should adjust interest rates. He emphasized that if policymakers loosen policy next week, it would be a "very serious mistake."

Summers indicated that if rate cuts had already begun, it would be a serious error, and cutting rates at the upcoming meeting would also be a very serious mistake. A rate cut on May 7 would undermine market confidence in the Federal Reserve's determination to combat inflation, thereby raising long-term borrowing costs.

The market widely expects that Federal Reserve Chairman Jerome Powell and his colleagues will keep interest rates unchanged at next week's meeting, as inflation remains above the 2% target level, and recent tariff increases by President Trump have also added upward price pressure.

Trump has repeatedly criticized Powell for not cutting rates this year, believing that the decline in energy and other prices is sufficient to support a rate cut.

U.S. Treasury Secretary Janet Yellen stated earlier on Thursday in a media interview that the two-year Treasury yield is signaling that the Federal Reserve should cut rates:

The U.S. Treasury market is signaling that the Federal Reserve should cut rates. We see that the two-year Treasury yield has fallen below the federal funds rate. This indicates that the market believes the Federal Reserve should consider a rate cut.

In response, Summers countered, "Inferring what policy the Federal Reserve should take based on the two-year Treasury yield is analytically unsound. I have not closely studied Secretary Yellen's comments, but if her remarks can be reasonably interpreted as guiding the Federal Reserve's policy direction, that would be a very unusual and problematic approach for a Treasury Secretary."

On Thursday, the market did not buy into Yellen's assertion that "the two-year Treasury yield is signaling that the Federal Reserve should cut rates," as the yield on U.S. two-year Treasury bonds increased by 10 basis points during the session, reaching 3.7%.

The Federal Reserve maintained the federal funds rate range at 4.25%-4.50% during the March FOMC meeting