“ ‘The Fed is positioned as well as it can be — given the credibility losses and mistakes that there have been — with these remarks to manage things going forward.’ ”
— Larry Summers
Former U.S. Treasury Secretary Lawrence Summers handed out some rare praise for the Federal Reserve on Friday, saying Fed chief Jerome Powell’s latest pledge to restrain inflation was a “statement of being resolute.”
Shortly after Powell spoke at the annual central-bank symposium in Jackson Hole, Wyo., Summers told Bloomberg that the Fed chairman had done “what he needed to do” and that it was clear the Fed’s “overwhelming priority” is pulling back inflation from the fastest pace in four decades.
In a brief six-page speech, Powell signaled the Fed is likely to keep raising interest rates and leave them elevated for a while to stamp out inflation. He said restoring the annual inflation rate to the 2% target is the central bank’s “overarching focus right now” even though consumers and businesses will feel economic pain.
Summers, a former chief economist at the World Bank, former director of the National Economics Council, and former U.S. Treasury secretary, as well as a former Harvard University president, has repeatedly criticized the Fed for failing to spot the recent surge in inflation and then acting too slowly to tackle it.
For example, earlier this week Summers said that the Federal Reserve is causing “confusion” among investors by avoiding a clear declaration that unemployment is likely to rise during its fight against inflation, according to the New York Post.
From the archives (June 2022): Here’s why Larry Summers wants 10 million people to lose their jobs
“The reality is that it’s probably not so realistic to think” the Fed can “get inflation all the way down without unemployment up — and they don’t want to acknowledge that,” Summers said a week ago. “That forces a certain confusion into all of their statements.”
The U.S. unemployment rate was just 3.5% through July, according to the most recent jobs report. At present, the Fed projects unemployment will reach just 4.1% by 2024, even as it implements a series of sharp interest-rate hikes that will weigh on the finances of U.S. firms.
Summers has argued that unemployment will have to rise to at least 5% to successfully tackle inflation and has pointed out that the U.S. stock and bond markets have rallied in recent weeks in a sign that investors were not yet seeing the Fed’s effort to cool the economy through tighter monetary policy as restricting economic growth.
U.S. markets got the message Friday when stocks tumbled, with the Dow Jones Industrial Average
closing down more than 1,000 points for its worst daily percentage drop since May, with focus on the Powell vow that the central bank would continue its battle against inflation until the job — of getting the annual rise in the U.S.’s cost of living back to its 2% target — “is done.”
After Powell’s speech at Jackson Hole, Summers praised Powell’s acknowledgment that there will be a price to pay for cooling inflation, noting short-term hits to employment and wages were acceptable for ensuring long-term prosperity.
Powell had “prioritized inflation, making clear that he recognized that that prioritization would have short-term adverse consequences that wouldn’t be easy,” Summers said, adding that the central bank was now as well-positioned as it could be given the errors committed, in his view, in the recent past.
The former Treasury chief said European Central Bank President Christine Lagarde has “a much harder job” than Powell given the euro area’s inflation, energy-price shocks and regional political problems.
“It’s going to be a very difficult road for them to walk in Europe,” Summers said. “My suspicion would be that they’re going to have to raise rates more than is currently priced in, but that’s going to come at a time when there’s very substantial recessionary forces.”