Former U.S. Treasury Secretary: Fed rate cuts need to be cautious, Republicans will create a "Tesla moment"!

Former US Treasury Secretary Lawrence Summers said that Republican politicians advocating for expanding the fiscal deficit and weakening the US dollar are creating a "Thatcher moment" for the United States.

Summers stated in an interview, "Whether it's in terms of defense spending or tax cuts, Republicans have been talking about measures to increase the deficit, with no signs that they will control the deficit, while allowing the dollar to depreciate will make it harder for the US to sell government bonds."

He added, "I think they are creating a 'Thatcher moment' for the US." He referred to the fiscal plan proposed by then British Prime Minister Thatcher in 2022, which led to financial market turmoil and forced her to resign just 44 days into office.

Former President Trump has hinted that he prefers a weaker dollar, criticizing the depreciation of the yen in a recent interview, believing it affects US competitiveness. His former Vice Presidential running mate, Senator Pence of Ohio, also expressed opposition to the negative impact of a strong dollar.

Summers said, "The political class generally underestimates the current fiscal policy risks, but the underestimation on the Republican side is much more severe. In this political year, the Democratic Party has not focused on fiscal challenges as much as I anticipated. But at least when the fire broke out, they did not pour gasoline on it, which is a very important distinction."

Summers also stated that the Federal Reserve must be "very cautious" on the issue of interest rate cuts, opposing former New York Fed President Dudley's call for the Fed to act quickly.

Dudley wrote in his column, "I have long been in the 'higher for longer' camp, insisting that the Fed must keep short-term rates at current or higher levels to control inflation. However, the facts have changed, so I have changed my mind. The Fed should cut rates, preferably at next week's policy meeting."

Previously, Summers had strongly criticized the Fed's strategy against inflation. He pointed out that signs of slowing inflation are to some extent a mirage, a trend caused by prices returning to normal after the COVID-19 pandemic, and the market should not expect this trend to continue. He believes that the record US deficit trend will continue to support demand and bring upward pressure on inflation.