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The Federal Reserve shouldn’t raise interest rates today but should at least start to express more concern about the inflation outlook, said former U.S. Treasury Secretary Larry Summers on Wednesday.
“The Fed has traditionally acted and spoken in ways that were designed to preempt inflation fears. Today, the Fed speaks in a way that’s designed to preempt the idea that the Fed might have inflation fears,” Summers said, during a webinar sponsored by the Council on Foreign Relations.
Fed Chairman Jerome Powell has said the Fed will not raise rates until the economy reaches full employment, and inflation has hit the Fed’s 2% target and is on track to exceed it for a bit.
Read: Powell’s interview on “60 Minutes”
The central bank also is buying $120 billion of Treasurys and mortgage-backed securities each month and said it would not begin to taper these purchases until there has been substantial further progress on its goals.
Summers said the Fed’s “dot-plot” projection that the central bank won’t raise interest rates until after the end of 2023 doesn’t make sense.
Instead of taking away the punchbowl before the party gets out of hand, the Fed is saying it won’t do anything until “we see a bunch of drunk people staggering around,” Summers said.
The Powell Fed is “trying to convince people that its a slow road to scaling back QE and one is going to have to go through that whole road before one would contemplate rate increases,” Summers said.
Summers said he was concerned with three factors; the Fed is saying “unlike all previous Feds” we can wait until we actually see inflation before we act on it, the Fed is expressing confidence it can keep inflation under control, and the “decades long tendency for the Fed to display exquisite sensitivity to the possibility of a meaningful asset price decline.”
These factors might make Americans worry more about inflation, he said.
Summers said the Biden administration should be worried because high inflation led voters to throw out Democratic presidents and elect Richard Nixon and Ronald Reagan.
Steven Cecchetti, an economics professor at Brandeis International Business School, said he wasn’t nearly as worried about inflation as Larry Summers.
In an interview, Cecchetti said inflation has been running below the Fed’s target for years.
“If we get 3% or 4% inflation for a year or two, it’s no big deal,” Cecchetti said.
Given the fiscal stimulus from Congress, the Fed wants to let the economy run a little bit hot to allow the unemployment rate to go down below 4%. Inflation won’t even average the Fed’s 2% target over the past 20 years, he added.
