Stock Groups

Fed ‘at Last’ Adopted Appropriate Policy Posture, Summers Says -Breaking


© Bloomberg. Lawrence

(Bloomberg) — Former Treasury Secretary Lawrence Summers voiced strong support for the Federal Reserve’s latest policy stance, after having long criticized the central bank for being slow to take up the fight against decades-high inflation.

“I thought the Fed’s posture at last was broadly appropriate,” Summers told Bloomberg Television’s “Wall Street Week” with David Westin. “Now the question’s going to involve carrying through.”

Fed policy makers backed raising interest rates by half a percentage point at the June and July meetings after a hike of that magnitude on May 4, minutes of this month’s gathering showed on Wednesday. “Many” officials thought they’d then be well positioned to “assess the effects” of their actions and the extent to which policy adjustments were needed, the minutes indicated.

Summers, who is also a Harvard University Professor and paid contributor for Bloomberg Television, suggests that US financial conditions are influencing how high the Fed should raise its interest rate.

“I’ve been uncertain as to where interest rates will have to go to achieve” an economic downturn that sends unemployment higher — a necessary condition for pulling down inflation. “Particularly all that’s happening that’s been adverse for financial conditions, in the stock market and in credit markets.”

CBO Criticism

The index is currently down around 14% from the high of January early, and yields for investment-grade corporate bonds have risen by nearly two percentage points over last year. 

Summers also blasted the Congressional Budget Office (a nonpartisan branch of the federal legislative) for making inaccurate economic projections in the latest edition this week.

“I’ve always thought of the CBO as a bastion of credibility” with regard to their projections, Summers said. But “this is their least plausible one in the 40 years that I’ve been watching.”

While the forecasts were prepared months ago, it appears that the CBO is “the last holdout on ‘Team Transitory,’” Summers said, referring to those who anticipated high inflation to be a blip as supply chain woes resolved and price gains came back down.

CBO predicts that the annual inflation rate would fall to 4.4% over the fourth quarter in 2022. It will then drop to 2.3% the following year, according to the price index for personal consumer expenditures. According to Friday’s release, that gauge showed a 6.3% rise in April.

It’s “conceivable” that supply-side shifts do help bring down inflation despite the “overheated” economy, Summers said. “How they could regard that as the most likely outcome is not something I can understand.”

Summers suggested that forecasting should be based on the assumption that both upside and downstream risks can be predicted. He said that 4% inflation is “much, much more plausible” than 0% inflation two years from now — which means that a roughly 2% call “isn’t really a best guess.”

©2022 Bloomberg L.P.