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Ex-US Treasury Secretary urges Federal Reserve to not make the 'Serious Error' of Raising Interest Rates

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August 27
1:34 AM 2015

Former U.S. Treasury Secretary Larry Summers claims that the aggressive sell-off on the global markets can lead to "a very serious situation" and raising interest rates could be a big mistake.

Summers was the U.S. Treasury head during the time of Bill Clinton. He compared the recent fierce sell-off to how the financial markets drifted down to the financial crisis in 2008-2009. He advised the Federal Reserve not to increase interest rates during their meeting next month. Janet Yellen heads the Federal Reserve.

The global and U.S. stock market seem to be headed straight to correction territory, while other foreign ones are just barely hanging on. These price slumps might prompt the Federal Reserve to delay the raising of interest rates, which is imminently expected. Worries over economic slowdown could be one of the major reasons for the delay, another is the wealth effect of the crash itself. If both of these reasons are taken together, the increase in interest rates will really be delayed.

The global sell-off frenzy Monday is one of the major reasons for the significant drop of U.S. stocks, sending the Dow Jones Industrial Average dwindling down to nearly 600 points. Meanwhile, investors are anxious over China's sluggish economy, leading to a worldwide market meltdown. In just a matter of six minutes, the Dow dropped for more than 1,000 points. This is the largest downward curve in just a single day in history for the Dow. Later on, it went back to 588 points, the lowest it has been in 18 months.

According to Summers, "A reasonable assessment of current conditions suggest that raising rates in the near future would be a serious error that would threaten all three of the Fed's major objectives - price stability, full employment, and financial stability." He said that raising rates may bring certain parts of the financial system into crisis.

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