- The Fed's interest rate hikes have created "an environment of two-sided risk", Larry Summers said.
- He warned there's a possibility of both high inflation and low economic growth for the US.
Markets are unsure about the Federal Reserve's next move because it's battling the twin threats of high inflation and sluggish growth at the same time, according to Larry Summers.
The former Treasury Secretary said the Fed needs to show it's willing to be flexible, so that its efforts to tame soaring prices don't plunge the US economy into a deep recession.
"Markets are saying, given all the uncertainties, they are very uncertain what the Federal Reserve will do," Summers tweeted Monday. "Forecasters should have humility, and the Fed should make clear its flexibility."
"We are very much in an environment of two-sided risk," he added.
The Fed has hiked interest rates by a jumbo 75 basis points at four consecutive meetings as it bids to cool inflation running at four-decade highs. Its hikes have lifted the base federal funds rate to 4%.
But major market voices ranging from Tesla and Twitter chief Elon Musk to "Dr Doom" economist Nouriel Roubini have warned the central bank's tightening campaign is increasing the risk of a recession in the US.
Summers said the current options on 1-year US Treasurys suggest investors anticipate base rates will remain between 2% and 5%.
"The market regards a protracted period of weakness as very possible and seeing some risk of continuing above target inflation," he said.
"I would not expect to see rates above 5, unless inflation is well above the 2 percent target, or rates below 2, unless the economy was quite weak," Summers added.