Economist Larry Summers was right before on inflation—and has another contrarian call now
Good morning,
In attempts to get inflation under control, the latest interest rate increase by the U.S. central bank is 0.75%—for the third consecutive time. But some experts, like Harvard economics professor Larry Summers, warn the Fed’s actions are too little and possibly too late.
My Fortune colleague Shawn Tully’s new feature article recalls his day with Summers, the former treasury secretary under Bill Clinton, and former chief economic adviser to Barack Obama. Sitting in his living room in Brookline, Mass., in August, Summers confirmed, he was a key player in the home stretch of the passing of the Inflation Reduction Act that’s set to fund green energy investments among other forms of domestic spending. “I was quite involved in the politics in the late stages,” he told Tully. “I had the credibility to say that [this bill] would not be inflationary. Several senators encouraged me to deploy that credibility, and I did.”
But went it comes to Summers' thoughts on how the Fed can get the U.S. economy out of its current unstable state: “He is, to say the least, not very upbeat,” Tully writes. “If we’re going to bring down inflation, you likely need a policy more restrictive than the policy that’s contemplated by the markets or the Fed,” Summers told Tully. “The Fed continues to be excessively optimistic.”
Tully writes: “As inflation remains worryingly high—clocking in at 8.3% in the latest August reading—a growing number of people in both camps [progressives and conservatives] now share Summers’ view that things are not, exactly, cool. For Summers, the greatest worry is that the Fed won’t have the resolve to raise rates high enough, and that the eventual cure will be far more costly than shouldering what could be a shorter, shallower downturn in the months ahead.”
Summers never believed inflation was transitory—just caused by COVID-related shutdowns and the supply-chain crunch. “For Summers, the chief source of today’s heavy inflation is over-the-top demand caused by too much money chasing too few goods,” Tully writes. “So to throttle a runaway consumer price index, the Fed must keep tightening monetary policy to the point where demand falls—sharply.”
Jerome Powell, chair of the Federal Reserve, said on Sept. 21 of the latest rate hike: “With today’s action, we have raised interest rates by 3 percentage points this year. At some point, as the stance of monetary policy tightens further, it will become appropriate to slow the pace of increases, while we assess how our cumulative policy adjustments are affecting the economy and inflation.”
He continued, “As shown in the [summary of economic projections] SEP, the median projection for the appropriate level of the federal funds rate is 4.4% at the end of this year, 1 percentage point higher than projected in June. The median projection rises to 4.6% at the end of next year and declines to 2.9 percent by the end of 2025, still above the median estimate of its longer-run value.”
But Summers thinks rates must go far higher than that to get the job done. How high? To find out, you can read more here in Tully’s complete article.
See you tomorrow.
Sheryl Estrada
sheryl.estrada@fortune.com
This story was originally featured on Fortune.com
