(Bloomberg) — Former Treasury Secretary Lawrence Summers argued against the Federal Reserve holding back from aggressive monetary tightening, saying any hesitation would cause greater economic damage.
“History records many, many instances where policy adjustments to inflation were delayed excessively and at very significant costs,” Summers told Bloomberg Television’s “Wall Street Week” with David Westin. “I don’t know of a great example where the central bank reacted too quickly to inflation and a high price was paid.”
Summers stressed that even Paul Volcker, who as Fed chairman overcame famously high inflation, “had sort of a false start,” as told in a recent op-ed by former Fed Governor Frederic Mishkin. In response to weakening economic data, Volcker eased the Fed’s stance in the spring of 1980, “which had to be reversed later,” generating higher interest rates than would otherwise have been necessary, he said.
“We have a substantial underlying inflation problem — it won’t come out without a very substantial monetary policy adjustment,” said Summers, a Harvard University professor and paid contributor to Bloomberg Television. “And the market is becoming aware of that.”
The S&P 500 index fell again on Friday, bringing the week’s decline from noon to more than 5%, as the bond market raised expectations for Fed rate hikes. Two-year Treasury yields are up about 32 basis points this week to 3.88% as of 12:07 a.m. in New York.
According to the predictions of Chairman Jerome Powell and his colleagues, economists will raise their benchmark interest rates by 75 basis points next week, bringing the top of the target range to 3.25%. Interest rate futures suggest that policymakers will push it towards 4.5% in the spring of 2023.
“We’re more likely to go above 4 1/2 than below 4 1/2, and I certainly wouldn’t be surprised if that percentage has to go above 5,” Summers said. “Whether the Fed stays on track and does what it takes to contain inflation, we’ll have to see how that plays out in the future.”
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