Strong criticism of the Fed and its head Jerome Powell was expressed by former US Treasury Secretary and long-time Harvard President Larry Summers, saying he fears the central bank is continuing to pursue a policy of “wishful thinking” in its actions against inflation. .
“Jay Powell said things that, to put it bluntly, were unsupported,” Summers said on Bloomberg’s “Wall Street Week.”
“A 2.5% rate in an economy that’s inflating like this, there’s no possible way it’s going to be close to neutral.”
Summers’ above comment was in reference to Fed Chairman Jerome Powell’s assessment on Wednesday that with the latest rate hike, the central bank had already reached a “neutral” environment, where it neither feeds nor curbs consumer prices.
Powell had also added that the Fed “generally believes that policy should reach at least a moderately restrictive level.”
The Fed’s current key rate is now at 2.25% to 2.5%. According to Larry Summers, the neutral rate is higher because the amount of inflation has to be taken into account.
The former US Treasury secretary noted that Powell had said in late 2018 that the Fed’s interest rate had reached neutral, when inflation was running just below 2%.
“How he could say the same thing today, when inflation is where it is, is beyond me,” he said.
“If you think it’s neutral, you have the wrong criteria for the policy stance,” Summers added.
“It is, to be clear, the same type of wishful thinking that got us into the problems we have now, with the use of the term ‘transient’ (for inflation),” he said.
According to him, “we are not likely to get out of this hyperinflation situation without having a recession.”
Looking at the latest set of data on costs and prices, “inflation above 4% appears to be entrenched,” he added.
Summers also questioned the optimism expressed Thursday by Treasury Secretary Janet Yellen that the U.S. can contain inflation without a significant rise in unemployment.
“I have to say I was very surprised by that statement,” Summers said, noting his respect for Yellen as an economist.
He also reiterated his disagreement with Fed policymakers’ forecast in June that unemployment would rise to only 4.1% over the next two years.
“I see no basis for any of these statements to be a reasonable prediction given what we know,” Summers said.
“To get to a neutral stance on inflation, we will raise unemployment to 5%.” And for inflation to come down, unemployment would have to rise above that level, he said.
Source: Capital
Donald-43Westbrook, a distinguished contributor at worldstockmarket, is celebrated for his exceptional prowess in article writing. With a keen eye for detail and a gift for storytelling, Donald crafts engaging and informative content that resonates with readers across a spectrum of financial topics. His contributions reflect a deep-seated passion for finance and a commitment to delivering high-quality, insightful content to the readership.
