Former Treasury Secretary Lawrence Summers said he remains worried that policy makers are complacent about inflation.
(Jan 22): Former Treasury Secretary Lawrence Summers said he remains worried that policy makers are complacent about inflation and he doubted U.S. consumer prices will return to a 2% pace of increases by the end of this year.
With investors expecting the Federal Reserve to next week signal plans to raise interest rates in March, Summers said that "the gravity of our situation is still understated" and that bottlenecks in China, rising oil costs, more expensive housing, tightening labor markets and low borrowing costs all pointed to continued price pressures.
"While the term 'transitory' has left the policy maker discourse, the idea of transitory inflation is still very fixed in their minds," Summers told Bloomberg Television's "Wall Street Week" with David Westin. "There's still a belief that with very limited monetary actions — that have not taken full effect — we will see inflation slow to the 2% range by the end of the year. That certainly could happen, but it wouldn't be my bet."
The consumer price index rose 7% in the 12 months through December, the most in almost 40 years, putting more pressure on the Fed to sharply tighten monetary policy. The Fed in December signaled it's likely to raise interest rates by three-quarters of a percentage point and begin trimming its $8.9 trillion balance sheet this year, but many investors and economists agree with Summers that it will need to be even more aggressive than that.
"The Fed's got a very delicate operation now in slowing it down," said Summers, a professor at Harvard University and paid contributor to Bloomberg . "The delicacy of that operation is underscored by the turbulence in asset markets since the beginning of the year.
Janet Yellen, the current Treasury chief and former Fed chair, told CNBC this week that while she expected inflation to remain north of 2% for most of this year, "if we're successful in controlling the pandemic I expect inflation to diminish over the course of the year and hopefully to revert to normal levels by the end of the year, around 2%."
"If we're going to have maximum employment and growth over time we're going to need to control the growth of total incomes — so that more of it can go into more employment and more output and less of it into inflation," said Summers. "I don't think it's the best bet that inflation is going to come into the 2% range by the end of the year. Complacency is not appropriate."
The former Treasury chief did praise the Fed for its "thoughtful, cautious approach" to the debate over whether it should create its own digital currency. The Fed this week issued a 35-page discussion paper on a government-backed coin, known as a central bank digital currency, or CBDC, marking its most significant action yet as it seeks to dive deeper into digital assets.
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