Larry Summers Says Federal Reserve In Hard Position With 'Stagflationary Shock' Ahead Of FOMC Decision: 'This Is What Tariffs Do'

Former Treasury Secretary Lawrence H. Summers has said that the central bank is facing “the most difficult challenge” amid higher prices and fewer jobs. This comes as the Federal Reserve is slated to announce its decision on interest rates by Wednesday afternoon.

What Happened: Larry Summers expects the apex bank’s monetary policy-setting body, the Federal Reserve Open Market Committee (FOMC), to hold the rates constant on Wednesday in line with market expectations.

CME Group’s FedWatch tool indicates a near-certainty of unchanged interest rates in March at 99%, with expectations shifting to significant rate cuts beginning in July with a 60%+ probability and increasing to nearly 90% in September.

Holding tariffs responsible for this challenging situation, he said, “This is what tariffs do.”

“If you are the Federal Reserve, you can't figure out if you go to the breaks because of price increases or the accelerator because of lost jobs. So I suspect the Fed won't move interest rates. They will say they need more data and they are watching,” said Summers in an X thread.

He describes this scenario as a “stagflationary shock,” which has put the Fed in a “hard position”.

See Also: Fed Put On Standby, While Trump Put May Be Kaput? Analysts Expect Jerome Powell To Pivot To A Measured Stance Amid Economic Uncertainty

Why It Matters: With inflation near 2% and growing economic uncertainty, analysts believe Jerome Powell might pivot to a more measured approach.

"The hawkish tone of Fed Chair Jerome Powell may likely change into a more measured one as he has to cite the economic uncertainty — especially tariff uncertainty,” said Eugenia Mykuliak, the founder and executive director at B2PRIME Group

The “Trump put” referring to adjusting President Donald Trump-led administration’s policies to support markets was off the table, the “Fed put” remained on standby. "The Trump Put may be kaput, but the Fed Put remains on standby," said Edward Yardeni, the President of Yardeni Research.

Earlier this month, while speaking at the University of Chicago Powell signaled the Fed will maintain current rates amid a strong labor market and near-target inflation, emphasizing no rush to adjust rates.

Price Action: The SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust ETF (NASDAQ:QQQ), which track the S&P 500 index and Nasdaq 100 index, respectively, fell on Tuesday. The SPY declined 1.08% to $561.02, and the QQQ also dropped 1.70% to $474.54, according to Benzinga Pro data.

On Wednesday, the future of Dow Jones rose by 0.13%, whereas the S&P 500 and Nasdaq 100 advanced by 0.19% and 0.26% respectively.

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