Summers Criticizes: "No Mainstream Economist Supports 1% Interest Rate"

"Serious Inflation Risk from Trump's Pressure on Interest Rates"
On Powell's Possible Dismissal: "Besant Recognizes the Danger"

Larry Summers, former US Secretary of the Treasury, criticized President Donald Trump's attempts to pressure the Federal Reserve (Fed) into lowering interest rates. He warned that efforts to strengthen political control over the Fed and artificially lower rates could actually fuel market expectations of inflation and drive up long-term interest rates.

According to Bloomberg TV on the 17th (local time), Summers appeared on "Wall Street Week" and said, "There is no mainstream economist anywhere who supports lowering interest rates to around 1% in the current situation." He added, "Such a move may bring a temporary boom to the economy, but at the cost of triggering a serious level of inflationary sentiment."

Larry Summers, former US Secretary of the Treasury. Photo by Getty Images Yonhap News

President Trump has been clashing with the Fed over interest rate cuts and has repeatedly pressured Fed Chair Jerome Powell to resign. The previous day, President Trump pointed out that the Fed’s renovation costs had increased by $700 million over the initial plan, stating, "Because of the 'fraud' that he (Chair Powell) is committing at the Fed, many people say he should be dismissed." According to the New York Times (NYT), President Trump reportedly shared a draft letter for Powell’s dismissal during a closed-door meeting with Republican members of the House on the evening of the 15th.

Since President Trump took office, the Fed has kept the benchmark interest rate steady at 4.25?4.50%, maintaining a cautious stance on rate cuts. Most Fed officials have maintained that rate cuts should be put on hold, citing the uncertainty about how high-tariff policies will affect inflation. In contrast, President Trump recently argued on his social media platform, Truth Social, that "the Fed should cut rates by 3 percentage points."

However, Summers predicted that President Trump would not dismiss Chair Powell before his term expires in May next year. He explained, "This is because the impact on the markets would be quite immediate and severe," adding, "Scott Besant, the Treasury Secretary with a career in financial markets, is likely well aware of the risks that would arise from such a move."

Summers also pointed out that the policy mix of the Trump administration could create a vicious cycle for the US economy. He explained that a massive budget deficit could drive up long-term borrowing costs, which would in turn increase the government’s interest burden and further widen the budget deficit. This could ultimately intensify upward pressure on interest rates.

He noted that bond yields and a weaker dollar are signals of the market’s distrust in the US government’s fiscal soundness. He also projected that, although the inflationary effects of tariff increases have not yet fully materialized, they could emerge over time.