Ex-Treasury chief Larry Summers says the Fed should consider a big bump in interest rates in July if it pauses this month

• Larry Summers said the Fed should consider a major rate hike in July if it pauses this month.
• The ex-Treasury chief warned the US central bank should be mindful of the economy overheating.
• Investors are expecting the Fed to pause it hikes this month in light of banking-system stress.

Hiking interest rates by 50 basis points in July should be an option on the table at the Federal Reserve, even if it pauses its tightening campaign at its meeting this month, according to former Treasury Secretary Larry Summers.

"With the general evidence of robustness in the economy, I think the lower risk strategy is for the Fed to raise rates in June," Summers said in a Bloomberg interview, referring to May's strong payroll report.

"It's a close call, and if they don't raise rates in June, I think they have to be open to the possibility that they may have to raise rates by 50 basis points in July if the economy continues to stay way hot and if inflation figures are robust," he added.

Investors are gearing up for the US central bank's next policy decision at its June 14 meeting, with traders in the Fed futures market seeing a 77% chance it will skip hiking benchmark rates this month, according to the CME FedWatch Tool.

Fed pause expectations have grown loud thanks to moderating inflation, and stress in the US banking system following the collapse of several major banks including Silicon Valley Bank, Signature Bank, and First Republic.

"Seeing where we are now, seeing the general picture in markets, I think we're again in a situation where the risks of overheating the economy are the primary risks that the Fed needs to be mindful of," Summers said.

Summers has previously voiced calls for more interest-rate increases even as chaos unfolded in the banking industry, as cooling inflation is still a priority given it remains above the Fed's 2% target at 4.9% through April.