Summers Warns: US Treasury's Call for Rate Cuts Would Be a Serious Mistake

"An Unusual and Problematic Choice for a Treasury Secretary"

Larry Summers, former US Secretary of the Treasury, criticized Treasury Secretary Scott Besant's call for interest rate cuts as inappropriate for someone in his position. He argued that there is a difference between bond market pricing and the Federal Reserve (Fed) making decisions on the benchmark interest rate, warning that if the Fed cuts rates at the upcoming Federal Open Market Committee (FOMC) meeting on the 7th, it would be "a very serious mistake."

Summers, who served as Treasury Secretary under the Bill Clinton administration, said on Bloomberg TV's "Wall Street Week" on the 1st (local time), "If rates had already been cut, it would have been a significant mistake." He also expressed concern that if the Fed lowers rates on the 7th, it would undermine confidence in its commitment to control inflation and drive up long-term borrowing costs.

Larry Summers, former US Secretary of the Treasury. AP·Yonhap

On the same day, Secretary Besant said in an interview with Fox Business that the yield on the 2-year US Treasury note is lower than the Fed's benchmark rate, stating, "This is a signal that the market believes the Fed should cut rates." As of around 2 p.m. Eastern Time, the yield on the 2-year Treasury note was hovering around 3.70%, which is significantly below the Fed's benchmark rate of 4.25-4.5%.

President Trump has repeatedly criticized Fed Chair Jerome Powell for keeping rates unchanged this year, arguing that falling energy and other prices justify a rate cut. On the 29th of last month, he said, "The Fed is really not doing a good job," criticizing Chair Powell. Secretary Besant's latest remarks lend support to President Trump's push for rate cuts.

Summers stated, "It is not analytically sound for the Fed to base its decisions solely on the 2-year yield," and added, "Although I have not closely reviewed Secretary Besant's comments, if he made statements that could be interpreted as instructive regarding the Fed's policy direction, it would be a highly unusual and problematic choice for a Treasury Secretary."

Secretary Besant has repeatedly emphasized the Fed's independence and stated that both he and President Trump focus on the 10-year Treasury yield, the global benchmark for bond rates. However, with President Trump continuing to criticize Chair Powell and Secretary Besant suddenly calling for a rate cut in public, Summers commented, "President Trump's advice is very misguided," adding that political pressure pushes up long-term rates. He further noted that it is "in many ways even worse" for the Treasury Secretary to comment on the Fed.

Summers pointed out, "People know that the President is a political figure who is expected to solve every problem. The Treasury Secretary, on the other hand, is expected to be a sophisticated financial expert who fully understands the importance of the Fed's independence."

However, the market expects the Fed to keep the benchmark rate unchanged at the FOMC meeting on the 7th. According to the Chicago Mercantile Exchange (CMF) FedWatch, the interest rate futures market is pricing in a 95% probability that the Fed will hold rates steady in May. Bloomberg News also forecasts that the Fed will maintain rates on the 7th. This is because inflation remains above the 2% target, and price pressures are expected due to President Donald Trump's tariff increases.