Harvard Economist Larry Summers Says Fed Should Keep Rates Hike

Harvard Economist Larry Summers Says Fed Should Keep Rates Hike

The Federal Reserve has been heavily criticized this year for failing to do enough to contain inflation. Last week, the Bureau of Labor Statistics revealed that prices rose again in August after a brief pause in July.

On Friday, Harvard University economist Larry Summers explained what he thinks the Fed should do next.

Speaking on Bloomberg’s “Wall Street Week,” Summers initially blamed the central bank for acting too slowly on inflation, noting that its aggressive stance is relatively new. “Just 15 months ago the Fed was saying the rate would be zero in mid-2023,” he said of the bank’s key rate, which is now at 2.5 percent.

As a result, Summer said, flattening the inflation curve will require even more monetary tightening. “It will not be easy to do what is necessary,” he said. “History records many, many instances where policy adjustments to inflation were too late and there were very significant costs.”

The most significant example of this cost, Summers said, was the prolonged period of high inflation during the 1970s.

To combat the latest round of inflation, the Fed instituted a first rate hike of 25 basis points in March, followed by a 50 basis point hike in May. Then in June, it raised interest rates another 75 basis points, the biggest increase since 1994, followed by the same 75 basis point increase in July.

The bank’s policymaking coalition, the Federal Open Market Committee (FOMC), did not meet in August but will meet this week to decide its next policy.

Aggressive action against inflation, according to Summers, is the best way to prevent widespread economic pain in society. “I know of no significant example where the central bank has reacted too quickly to inflation and a large cost has been paid,” he said.

Triggering a recession through tight economic policy, Summers previously argued, would be better than long-term inflation. “In terms of minimizing the risk of a stagflation disaster, the Fed must be prepared to stay the course,” he said.

All signs point to the Fed taking Summers’ advice. Last month, Fed Chairman Jerome Powell said the bank needs to see significant evidence that inflation is under control before it starts cutting interest rates again.

In August, the Consumer Price Index rose 0.1% from July, with inflation running at 8.3% year-on-year.

“To me it was unwelcome, but not completely unexpected,” Summers said of the latest monthly numbers. “I think the correct reading of the data was that measured inflation does fluctuate significantly, but we have a significant underlying inflation problem.”

This underlying inflation problem, he said, will be difficult to control. “This does not come without a very substantial adjustment of monetary policy and the market is waking up to this fact.”

This story was originally featured on Fortune.com

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