Former Treasury secretary, director of the National Economic Council believes Fed is wrong about current policy being too restrictive
While the Federal Reserve appears set to continue rate easing during its final two meetings of 2025, one former government official believes the Fed has the wrong idea.
Lawrence Summers (pictured top right), former Treasury secretary under President Bill Clinton, and former director of the National Economic Council under President Barack Obama, gave his thoughts on a panel at the Mortgage Bankers Association annual event in Las Vegas on Monday.
He was joined by Gary Cohn, former director of the National Economic Council under President Donald Trump during his first term, and current vice chairman of IBM.
Summers believes that the neutral rate for the Fed is much higher than some of the current members believe, and so he doesn’t think the current Fed funds rate is restrictive.
“I’m off consensus on what I’m about to say,” Summers said. “The neutral rate is north of 4 (percent). The neutral rate was 2.5% coming into COVID. At that time, we were struggling to get to 2% inflation. Now we’re closer to 3% than we are 2%, so 75 basis points more inflation. That takes us from 2.5% to 3.25%.
“What about real interest rates? We have 25% more government debt. We have 2% or 3% of GDP more budget deficits. We have substantially more wealth and looser financial conditions. It’s just hard to believe that to sterilize all that you don’t need more than 100 basis points higher real interest rates.”
Rising rate?
Summers believes due to those factors that interest rates could actually rise from this point instead of falling.
“I think the Fed is inertial in its judgment of the neutral rate,” he said. “I think markets will wake up to that. I think rates are considerably more likely to rise than fall from here. And I think the Fed is wrong to think that its current posture is significantly restricted and therefore needs to be corrected in order to avoid restriction.”
Cohn (pictured top left), believes the Fed funds rate will continue to drop, citing MBA chief economist Mike Fratanoni’s prediction that it will get down to 3.2% next year. But he’s not sure that will equate to lower interest rates due to a lack of movement from the 10-year treasury.
“There’s a little bit of a factor of there’s 1600 Pennsylvania Avenue noise saying they want lower interest rates,” Cohn said. “And there’s the head of the National Economic Advisors on the Fed, which is quite interesting. I think the Fed right now is going to be on this methodic easing cycle. I think in the real economy, the 10-year rate is not really moving.”
Increased risk
Summers believes that Treasury secretary Scott Bessant’s plan to bring down the rate on the 10-year treasury is too risky.
“I’m on the political team that I’m on, but when Secretary Bessant was critical of the Clinton administration, of the Biden administration for the turning in of the debt, I agree with him,” Summers said. “Unfortunately, now that he’s in office, he has set a goal of bringing the 10-year treasury down to 3%. And the only tool he has to do that is issuing less long-term debt.”
He said one thing working in the United States’ favor right now is the struggles in other markets, which continue to make the dollar look stronger by comparison. However, he said it’s also driving longer-term investors to the gold market instead.
“There is a general drying up of demand for paper long term debt from major countries in Europe,” Summers said. “You see it in Japan. The dollar is fortunate in its alternatives. Europe is a museum, Japan is a nursing home, China is a prison, and Bitcoin is an experiment. But the dollar isn’t that great, and that’s why gold is on fire.”
Fed independence
Summers said when he advised Clinton and Obama on potential criticisms of the Fed, he said that it was a losing battle in both the short-term and the long-term.
“What I said to President Clinton 30 years ago was that bashing is a fool’s game,” he said. “They will not listen very much. So you will not change the short-term interest rate very much. The market will listen and push up the long-term rate.”
Amir Nurani of Left Coast Leaders said persistent media focus on rate cuts is causing buyers to wait for a “magical drop” that may never come, urging borrowers to act now as waiting could mean missing out on equity gains amid ongoing housing shortages.https://t.co/BsWEZUD52P
— Mortgage Professional America Magazine (@MPAMagazineUS) October 17, 2025
When it comes to the political pressure being put on by the current Trump administration, Summers believes there are two potential outcomes in play.
“I think all of what he’s doing is in part because he hopes maybe he’ll successfully bully them into lower rates,” Summers said. “And lower rates would be good. By my view, that’s a third of it. I think two thirds of it is laying a predicate. If the economy goes well, nobody’s going to be upset that he did this, and if the economy goes poorly, he’s got a scapegoat that’s not him and his tariffs.”
Cohn agreed, and stated that he had these conversations with the president during his first term.
“We explained to the president 100 times that the Fed’s independent,” Cohn said. “When he wanted to get lunch with the Fed, I said I have to sit in the lunch. He said, ‘You can’t sit in on the lunch.’ I said, ‘Okay, fine, Don McGahn the White House Counsel, can sit in.’ He goes, ‘I’d rather have you.’ The whole thing is, either (he) wants low rates or (he) wants to have the ability to blame.”
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