August 19, 2022

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Summers warns the Fed of a mistake similar to the 1970s crisis

Summers warns the Fed of a mistake similar to the 1970s crisis

Bloomberg – Former Treasury Secretary Lawrence Summers said he was concerned about a slowdown in headline inflation in upcoming data Led the Federal Reserve to the conclusion that its policies are workingAnd the While more work is actually needed.

“I am concerned that we will see good news on non-core inflation,” Speaking on Bloomberg Television’s “Wall Street Week” with David Westin, Summers said, prior to the release of consumer price data on Wednesday, Which will show a reduction in inflation, especially thanks to lower gasoline costs.

Besides some signs of an economic slowdown, The risk is that it will “lead the Fed to believe things are under control”.

However, the US economy Still in a “hottest” state, as evidenced by the July employment and wage figures published on FridaySummers said. A “overheating” labor market would mean “steady or even accelerating inflation,” he said.

Payroll increased by 528,000 in July, A sweeping progress that exceeded all estimates and was the largest in five monthsData from the Labor Department showed on Friday.

“Everything in that number tells me the temperature is rising, It wasn’t under control yet, and it wasn’t going to be under controlsaid Summers, a Harvard University professor and paid contributor to Bloomberg Television. “My anxiety has already been amplified,” he said.

Summers pointed out that his old economic partner in the intellectual debate, Nobel laureate Paul Krugman has also warned that it is not yet time for the Federal Reserve to change course. Federal Reserve policymakers raised interest rates by 75 basis points in each of the last two meetings, the most severe tightening since the 1980s.

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Krugman previously wrote in the New York Times that “the good news we’re about to receive is about short-term inflation It is not proof that the strategy actually worked Unfortunately (I’m usually a financial pigeon), it provides no justification for switching to easier money.”

The danger, Summers said, is that “We will have a situation like we were in the seventiesWe perpetuate inflation by not doing enough to contain it.”

Except for foodstuffs and raw materials such as energy,”We have, by all reasonable measures, core inflation somewhere around plus or minus 5%.Summers said. This is more than what happened when Richard Nixon implemented price controls. This is not acceptable in any dimension.”

The former Treasury chief reiterated his criticism of Federal Reserve Chairman Jerome Powell’s assessment last month that with the latest rate hike, The central bank has already reached a “neutral” environment, in which it neither fuels nor limits consumer prices.

“I don’t think the Fed has the lead right now,” Summers said. Without a significant increase in real interest rates, which are adjusted according to some indicators of inflation, “So we’re just setting the stage for stagflation,” he said.

Read more at Bloomberg.com