Larry Summers.
REUTERS/Ruben Sprich
Larry Summers urged the Federal Reserve to keep hiking interest rates to beat inflation.
It would be riskier for the central bank to act too slowly than too aggressively, he said.
The former Treasury boss warned that Europe’s energy crisis would factor into US inflation.
The Federal Reserve needs to keep hiking interest rates to crush inflation and avoid an economic disaster, Larry Summers has warned.
“We’ve got a substantial underlying inflation problem that doesn’t come out without very substantial monetary policy adjustment,” the economist told Bloomberg on Friday.
Summers, an economics professor at Harvard University, served as Treasury secretary under President Bill Clinton, and as the director of the National Economic Council under President Barack Obama.
He pointed to core inflation rising over 6% in August, the climbing cost of housing components, and the sharp increase in wages for workers switching jobs as evidence of embedded price increases.
The economist noted that only 15 months ago, markets expected rates to still be near zero in mid-2023, whereas now they’re pricing in hikes from roughly 2.5% today to 4.5% by next summer.
“The idea that that would change financial conditions can hardly be a very surprising one,” he said.
Summers told Bloomberg that if the Fed is serious about curbing inflation, he wouldn’t be surprised if rates peaked at north of 5%. He cautioned that if the central bank hikes too slowly or backs down from its inflation battle, the result could be stagflation — a devastating mix of declining economic growth, high inflation, and rising unemployment.
“History records many, many instances when policy adjustments to inflation were excessively delayed, and there were very substantial costs to that,” he said. “I am aware of no major example in which the central bank reacted with excessive speed to inflation, and a large cost was paid.”
Moreover, Summers flagged “enormous uncertainty” in markets exposed to Russia’s invasion of Ukraine, including oil, natural gas, diesel, and fertilizer.
“A great deal in the US inflation process is going to hinge on whether — as markets tend to be pricing — oil prices stay moderate or even come down, or whether — as geopolitical experts warn — we hit adverse developments and those prices spike up again,” he said.
The former Treasury chief outlined how government policies could support the Fed’s inflation fight during a CNN interview on September 16.
Approving permits for wind-power plants, slashing the prices of pharmaceuticals, easing drilling restrictions on natural-gas producers, and reducing tariffs on crucial imports could assuage some of the upward pressure on prices, he said.
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