TL/DR –
Larry Summers, Harvard professor and former Director of the National Economic Council under President Obama, has suggested that the influx of private sector investment into green initiatives and the IRA could lead to a rise in interest rates. He has expressed confusion over the Federal Reserve’s belief that the ultimate neutral rate is 2.6, given the current context of bigger deficits, greater debt, and increased demand from areas such as AI, housing, and stock markets. Summers believes it is more likely that the neutral rate will reach four percent, rather than two.
Summers Predicts Rising Interest Rates Due to Green Investments and IRA
In a recent episode of Bloomberg’s “Wall Street Week,” distinguished Harvard Professor and economist, Larry Summers, who also served under Presidents Obama and Clinton, voiced his expectations for increasing interest rates. He attributed this forecast to the significant surge of new private sector investments in green initiatives and the IRA.
Summers expressed his puzzlement over the Federal Reserve’s conviction that the ultimate neutral rate is at 2.6, considering the current economic climate. He pointed out that compared to a few years ago, when the rate was set at 2.5, there’s been a drastic shift in fiscal policy, with higher deficits and a larger role of debt, thereby exerting pressure on credit markets.
He further explained that the influx of private sector investments in green technologies and the IRA, along with the anticipated demand for chips and electricity due to the AI revolution, significantly contribute to these economic shifts. Additionally, the wealth effect from soaring housing and stock markets in recent years is also a major factor.
Given these demand drivers, Summers finds it hard to believe that the neutral rate would remain the same as four years ago. He contends that it is more likely to reach a four-handle than maintain a two-handle in the present situation.
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