Larry Summers accuses Federal Reserve of ‘dangerous complacency’ in the face of inflation

Lawrence Summers, the former US Treasury Secretary, severely reprimanded the Federal Reserve for its loose monetary policies, accusing the central bank of creating “dangerous appeasement” in financial markets and of misinterpreting financial markets. economy.

Summers’ comments at a conference hosted by the Federal Reserve Bank of Atlanta marked a significant escalation in his attacks on the US central bank. Harvard University economist and former top Democratic presidential adviser previously criticized Joe Biden fiscal stimulus too excessive earlier this year.

Summers said monetary and fiscal policymakers had “underestimated the risks, very substantially, to both financial stability and inflation extremely low interest rates for an extended period ”.

The Fed has pledged to keep U.S. interest rates close to zero until the recovery reaches certain milestones, including full employment, while forecasting that spikes in inflation will be transient. The latest median forecast from central bank officials shows that the lowest rates remain in place until at least 2024.

“Policy projections suggest that rates may not be increased for. . . almost three years creates a dangerous complacency, ”Summers said, adding that the Fed could be forced into an instinctive tightening of monetary policy that would scare the markets and even hurt the real economy.

“When, as I think is quite likely, there will be a strong need to adjust the policy, those adjustments will come as a surprise.” This “jolt” would do “real damage to financial stability and could do real damage to the economy,” Summers warned.

the fed argued that strong monetary support to the economy was still needed due to the risk of the recovery slowing and lack of jobs from pre-pandemic levels. He also doesn’t expect the current surge in consumer prices to last, arguing that it is being fueled by supply chain bottlenecks and economic reopening.

Summers warned that the notion of an equal balance between inflationary and deflationary risks, and between financial bubbles and credit problems was “a long way from an accurate reading of the economy right now.”

“The main risks today relate to overheating, asset price inflation and the resulting excessive financial debt and ensuing financial instability. Not a slowing economy, excessive unemployment and excessive stagnation, ”Summers said.

“It is not tenable to assert today in the contemporary American economy that the slowdown in the labor market is a dominant problem,” he added. “Walking outside: labor shortage is the ubiquitous phenomenon. ”

Summers’ attacks on U.S. economic policymakers this year have been particularly scathing because he is a Democrat, and resulted in him being strongly criticized within the party. Liberal activists in particular say he is out of touch with the struggles of middle and low income households.

They say Summers – who served as Secretary of the Treasury from 1999 to 2001 – represents the pro-market, deficit-fighting wing of the Democratic economic establishment that has supported overly strict fiscal policies under the administrations of Bill Clinton and the United States. Barack Obama, leading to the middle class. stagnation and revolt against globalization.

None of this deterred Summers from taking a very public stand. On Tuesday, he said the Fed’s new policy framework, approved in August last year to be more inflation-tolerant after the lessons of the financial crisis, was not suited to the current environment.

“This is not a reasonable place for politics in a world where the budget deficit has been increased by 15 percent by stimulus policy,” Summers said. “I would rather we come back and go back to a Fed that is concerned with anticipating inflation, rather than a Fed [that] worries about not worrying about being worried about inflation. ”

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