“ “The Fed is positioned as well as it can be — given the confidence lapses and the mistakes it’s had — with these remarks to steer things forward.” “
Former US Treasury Secretary Lawrence Summers dished out some rare praise for the Federal Reserve on Friday, saying Fed chief Jerome Powell’s latest pledge to rein in inflation was a “statement of resolve”.
Shortly after Powell spoke at the central bank’s annual symposium in Jackson Hole, Wyo., Summers Bloomberg said that the Fed chairman had done “what he had to do” and that it was clear that the Fed’s “overwhelming priority” was to bring inflation back from its fastest pace in four decades.
In a brief six-page speech, Powell signaled that the Fed would likely continue to raise interest rates and keep them elevated for some time to quell inflation. He said that getting the annual inflation rate back to the 2% target was “the main focus of the central bank right now”, although consumers and businesses would feel economic pain.
Summers, a former chief economist at the World Bank, former director of the National Economic Council and former US Treasury secretary, as well as former president of Harvard University, has repeatedly criticized the Fed for failing to notice the recent spike in inflation and then acting too slowly to deal with it.
For example, earlier this week Summers said the Federal Reserve was causing “confusion” among investors by avoiding a clear statement that unemployment was likely to rise during its fight against inflation. according to the New York Post.
From the archives (June 2022): This is why Larry Summers wants 10 million people to lose their jobs
“The reality is that it’s probably not that realistic to think that ‘the Fed can’ reduce inflation all the way without raising unemployment — and they don’t want to admit that,” Summers said a week ago. “It adds some confusion to all their statements.”
The U.S. unemployment rate was just 3.5% through July, according to the latest jobs report. The Federal Reserve currently projects unemployment to reach just 4.1% by 2024, even as it implements a series of sharp interest rate hikes that will weigh on the finances of American businesses.
Summers argued that unemployment would need to rise to at least 5% to keep up with inflation, and pointed out that US stock and bond markets have rallied in recent weeks in a sign that investors are still missing the point of the Fed to cool the economy through tighter monetary policy such as curbing economic growth.
U.S. markets got the message on Friday as stocks tumbled with the Dow Jones Industrial Average
closure down more than 1,000 points for its worst daily percentage drop since Maywith a focus on Powell’s pledge that the central bank will continue its fight against inflation until the job — raising the annual cost of living in the U.S. back to the 2% target — “is done.”
After Powell’s Jackson Hole speech, Summers praised Powell’s acknowledgment that cooling inflation would come at a price, noting that short-term hits to employment and wages were acceptable to ensure long-term prosperity.
Powell has “prioritized inflation, making it clear that this prioritization will have short-term adverse effects that will not be easy,” Summers said, adding that the central bank is now as well positioned as it could be. the mistakes committed in his opinion in the recent past.
The former Treasury chief said European Central Bank President Christine Lagarde had a “much more difficult job” than Powell given eurozone inflation, energy price shocks and regional political issues.
“It’s going to be a very tough road for them in Europe,” Summers said. “My suspicion would be that they would have to raise rates more than is currently projected, but that would be at a time when there are very significant recessionary forces.”