"US inflation whistleblower" warns: The Fed's interest rate cut may not be as much as the dot plot.

Former US Treasury Secretary Lawrence Summers, also known as the "US inflation whistleblower", recently stated that the market's view on the Federal Reserve's rate-cutting path is too aggressive, and the potential threat of inflation may hinder the Fed from lowering rates in line with its expected path as indicated on the dot plot in the next few years. "In fact, based on the dot plot, it seems that Fed policymakers believe that loose monetary policy may go too far, but this poses a significant risk to the potential growth trend of inflation rate," Summers said in an interview with the media on Thursday. In their latest forecast chart of the US benchmark interest rate (known as the "dot plot"), Fed policymakers expect the median rate to be 3.4% by the end of next year, reflecting the possibility of further rate cuts of up to 1.5 percentage points following the Fed's 50 basis point cut announced on Wednesday. The market, however, has a more aggressive expectation on the rate cut magnitude, with interest rate futures markets expecting the Fed to cut rates further by 1.75 to 2 percentage points by the end of next year. Summers, who is also a Harvard University professor, warned investors that the financial markets have greatly overestimated the loose monetary policy that the Fed is about to adopt. He has long been regarded by Wall Street economists as the "US inflation whistleblower" for warning as early as 2021 that US inflation could surge, and for insisting when rate cut expectations were soaring last year that the market was overpricing the possibility of multiple rate cuts by the Fed in 2024. He also believed that inflation could rebound and that the Fed was seriously underestimating the long-term neutral interest rate level. Higher long-term rates "I suspect that long-term rates will rise to some extent in the future - possibly a significant increase in long-term rates for the 10-year or 30-year term," he said in the interview. As of Thursday's US stock market close, the yield on the 10-year US Treasury bond, known as the "global asset pricing anchor", was about 3.71%, far below last year's historical high above 5%, reflecting the bond market's extremely aggressive pricing of the Fed's rate-cutting path, which leads significantly ahead of the Fed's interest rate curve. Summers pointed out that with time, higher yield curves will push up US mortgage rates. The recent decline in the long-term borrowing cost has begun to stimulate the expansion of demand for US housing loans, providing hope for a rebound in demand for the US real estate market. "Compared to the potential average level we may expect in the next five years, the mortgage rates people are seeing now are relatively low," Summers said in the interview. According to statistics from the Mortgage Bankers Association of America (MBA), last week the interest rate on 30-year fixed-rate mortgages in the US was about 6.15%, significantly lower than the 6.78% at the beginning of the year. In the five years before the outbreak of the COVID-19 pandemic, the average level of this long-term interest rate fluctuated around 4.2%. Mortgage rates fall from highs of decades In the interview, Summers reiterated his personal view that the Fed may be underestimating the neutral rate - the rate at which Fed policymakers believe their benchmark rate matches a 2% inflation rate. Fed officials have indeed raised their long-term neutral rate expectations in their latest economic data forecasts released on Wednesday, with the median expected baseline rate stabilizing starting in 2026, rising to 2.875%. Fed Chairman Jerome Powell said at a press conference that the long-term neutral rate "may be much higher than in the years before the COVID-19 pandemic", when global government bond yields were negative in the tens of trillions of dollars. "We are not yet sure where the neutral rate is, we can only understand it through its operation and economic data," Powell said at the press conference after the rate decision. This means that if the Fed's baseline rate is set lower than the long-term neutral rate, inflation will rise. Summers said that higher US fiscal borrowing and major investments in renewable energy and artificial intelligence suggest that the long-term neutral rate is at least 4% - a rate far higher than implied by the Fed's dot plot showing the long-term neutral rate. View on Nippon Steel's acquisition of US Steel The former Treasury Secretary also expressed his appreciation for the Biden administration's decision to delay the review of the proposal for Japan's steel industry giant Nippon Steel Corporation to acquire US Steel Corporation. According to media reports this week, the Japanese company has been allowed to resubmit its acquisition plan. "We have avoided the disastrous actions that Pennsylvania steelworkers and major steel users, including US automakers and domestic defense industries, could have taken," Summers said. He emphasized, "I hope that in a more stable environment after the US presidential election, cooler heads prevail and the market can operate normally."