Former Treasury Secretary Lawrence Summers said he is concerned that the slowdown in inflation in the next Fed data will lead the Federal Reserve to conclude that its policies are working, when in fact much more action is needed.
“I’m concerned that we’re going to see some good news on non-core inflation,” Summers said on Bloomberg Television’s “Wall Street Week” ahead of consumer price data due on Wednesday, which is expected to show a slowdown in inflation. , thanks mainly to the sliding cost of gasoline. Coupled with some signs of an economic slowdown, the risk is that this “will lead the Fed to believe things are under control.”
The U.S. economy, however, remains “overheating,” as evidenced by July employment and wage data released Friday, Summers said. A “hot” labor market will mean “stable or even accelerating inflation,” he said.
New jobs rose by 528,000 in July, a rise that beat estimates and was the largest in five months, Labor Department data showed on Friday.
“Everything in this number tells me that warming is not yet under control and is not yet on track to be under control,” Summers said. “My concern was actually magnified,” he said.
Summers pointed out that his sometimes intellectual “rival” in economics, Nobel laureate Paul Krugman, also warned that now is not the time for the Fed to change course. Fed policymakers have raised interest rates by 75 basis points at each of the last two meetings, in the most aggressive tightening since the 1980s.
Krugman earlier wrote in the New York Times that “the good news we’re about to get on short-term inflation is not evidence that the strategy has already paid off, and unfortunately (I’m usually a monetary dove), it offers no justification for a shift toward easier money”.
Summers said the risk is “that we have a situation like in the 1970s, where we perpetuated inflation by not doing enough to curb it.”
Stripping out food and commodities like energy, “we have by any reasonable measure core inflation running somewhere plus-or-minus 5%,” he said. “This is more than when Richard Nixon put price controls in place. This is not acceptable in any way.”
The former Treasury chief reiterated his criticism of Fed Chairman Jerome Powell’s assessment last month that, with the latest rate hike, the central bank had already reached a “neutral” setting that neither spurs nor constrains consumer prices .
“I don’t think the Fed has the reins right now,” Summers said. Without a significant boost in real interest rates — which are adjusted for some measure of inflation — “then we’re just setting the stage for stagflation,” he said.