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

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EconomyMay 27, 2022 02:09PM ET

© 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, a Harvard University professor and paid contributor to Bloomberg Television, suggested that the tightening in US financial conditions could shape how high the Fed needs to take interest rates.

“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 is down about 14% from its high in early January, while yields on investment grade corporate bonds have surged by almost two percentage points since the end of last year. 

Summers separately blasted the Congressional Budget Office, a nonpartisan arm of the federal legislature, for what he saw as inaccurate economic projections in its latest release 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.

The CBO predicted that the year-over-year inflation rate will drop to 4% by the fourth quarter of 2022, and to 2.3% a year later, as measured by the price index for personal consumption expenditures. That gauge saw a 6.3% jump in April, a release showed Friday.

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.”

A good rule of thumb in forecasting is to ensure that the upside and downside risks are equally plausible, Summers said. 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.

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