On Friday, Harvard economist Larry Summers laid out what he thinks the Fed should do next.
go on Bloomberg’s “Wall Street Weekly,” Summers started by accusing the central bank of being too slow on inflation, noting that its aggressive stance is relatively new. “Just 15 months ago, the Fed said rates would be zero by mid-2023,” he said of the bank’s benchmark rate, which currently stands at 2.5 percent.
Therefore, Summer said, narrowing the inflation curve will require further tightening of monetary policy. “It’s not easy to do what’s necessary,” he said. “History has documented many, many examples of policy adjustments to inflation being overly delayed and very costly.”
The most important example of these costs, Summers said, was the prolonged period of high inflation in the 1970s.
To combat the latest bout of inflation, the Fed raised rates for the first time by 25 basis points in March, followed by a 50 basis point hike in May. Then, in June, it raised rates by another 75 basis points, Largest increase since 1994Followed by The same rate hike of 75 basis points in July.
The bank’s policy-making coalition, the Federal Open Market Committee (FOMC), did not meet in August but will meet this week to decide on next policy moves.
Summers believes that actively tackling inflation is the best way to prevent economic pain from spreading widely in society. “I don’t know of a major example of a central bank reacting too quickly to inflation and paying a huge price,” he said.
Triggering recessions through tight economic policies, Summers has previously argued, will be better than long-term inflation. “In terms of minimizing the risk of a stagflation catastrophe, the Fed must be prepared to stay the course,” he said.
All signs point to the Fed following Summers’ advice. last month, Fed Chairman Jerome Powell says The bank needs to see significant evidence that inflation is under control before it starts cutting rates again.
In August, the consumer price index rose 0.1% from July, and inflation rose 8.3% year-on-year.
“To me, they were unpopular, but not entirely unexpected,” Summers said of the latest monthly data. “I think the correct reading of the data has been that headline inflation has fluctuated wildly, but we have a major underlying inflation problem.”
Potential inflation problems will be difficult to control, he said. “Without a very substantial monetary policy adjustment, that won’t happen, and the market is waking up to that fact.”
sign up Wealth characteristics Email list so you don’t miss our biggest features, exclusive interviews and surveys.