(Bloomberg) — Former Treasury Secretary Lawrence Summers has argued against the Federal Reserve’s refrain from aggressive monetary tightening, saying the biggest economic damage would come from any hesitation.
“History records many, many cases where policy adjustments for inflation were excessively delayed and there were very large costs to that,” Summers said in an interview with David Westin on Bloomberg Television’s Wall Street Week. “I don’t know of any major example in which the central bank responded too quickly to inflation and paid a large cost.”
Summers highlighted that even Paul Volcker, who is best known for defeating high inflation as Fed chair, “had somewhat of a false start,” as noted in a recent opinion piece by former Fed Governor Frederic Mishkin. In response to weak economic data, Volcker softened the Fed’s stance in the spring of 1980, “which then had to be reversed” later, leading to higher interest rates than would have been needed, he said.
“We have a fundamental underlying inflation problem — one that does not emerge without a fundamental adjustment of monetary policy,” said Summers, a Harvard professor and a paid contributor to Bloomberg Television. “And the market is waking up to this fact.”
It fell again on Friday, bringing the week’s decline as of midday to more than 5%, as the bond market ramped up expectations for a Fed rate hike. Two-year Treasury yields jumped about 32 basis points this week, reaching 3.88% as of 12:07 p.m. in New York.
Economists expect President Jerome Powell and his colleagues to boost the benchmark interest rate by 75 basis points next week, bringing the top of the target range to 3.25%. Interest rate futures suggest that policy makers will take it around 4.5% by the spring of 2023.
“We are more likely to end up above 4 1/2 than we end up being below 4 1/2, and it certainly wouldn’t surprise me if that rate had to go above 5,” Summers said. “Whether the Fed will continue the path and do what is necessary to contain inflation, we will have to see how that works down the road.”
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