Former Treasury Secretary Lawrence Summers said he was concerned the Federal Reserve is still engaging in “wishful thinking” about how much it will take to bring inflation down from four-decade highs.
“Jay Powell said things that, to be blunt, were analytically indefensible,” Summers said on Bloomberg Television’s “Wall Street Week” with David Westin. “There is no conceivable way that a 2.5% interest rate, in an economy inflating like this, is anywhere near neutral.”
Summers was referring to Fed Chair Jerome Powell’s assessment on Wednesday that, with the latest interest-rate hike, the central bank had already reached a “neutral” setting -- where it’s neither stoking nor restraining consumer prices. Powell also said that the Fed “broadly feels that we need to get policy to, at least, to a moderately restrictive level,” past neutral.
The Fed’s current target rate is now 2.25% to 2.5%. Summers said a neutral setting would be higher, because it has to take account of where inflation is. Data on Friday showed the Fed’s preferred inflation gauge climbed 4.8% in the year to June, stripping out food and energy.
Summers isn’t alone in taking issue with Powell’s judgment. Former Federal Reserve Bank of New York President William Dudley said on Wednesday that, given the level of uncertainty, “I’d be a bit more skeptical” in saying policy makers had reached neutral.
Mohamed El-Erian, chief economic adviser to Allianz SE and a Bloomberg Opinion contributor, said on Bloomberg TV Friday that “the zip code for neutral is above where we are now,” and at least 50 basis points higher.
Summers, a Harvard University professor and paid contributor to Bloomberg TV, noted that Powell said in late-2018 that the Fed’s rate had reached neutral -- when inflation was running just below 2%. “How he could be saying the same thing today, when the inflation rate is where it is, is inexplicable to me.”
“If you think it is neutral, you are misjudging the posture of policy in a fundamental way,” said Summers. “It’s the same kind of, to be blunt, wishful thinking that got us into the problems we have now, with the use of the term ‘transitory.’”
The former Treasury chief reiterated his view that “we’re not likely to get out of this excess inflation situation without having a recession.” Looking at the latest slew of indicators on costs and prices, he said “inflation above 4 looks to be pretty securely built in.”
Summers also took issue with optimism expressed Thursday by current Treasury Secretary Janet Yellen that the US can quell inflation without a major jump in joblessness.