Summers warns Fed of 1970s-style mistake as CPI slows

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(Bloomberg) — Former Treasury Secretary Lawrence Summers said he worries that a slowdown in headline inflation in upcoming data will prompt the Federal Reserve to end its policies, when in fact more action is needed.

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Summers said on Bloomberg Television’s “Wall Street Week” with David Westin, ahead of consumer price data due on Wednesday that is set to show a decline in inflation, thanks in particular to lower gasoline costs. Besides some signs of an economic slowdown, the risk is that it will “lead the Fed to believe things are under control”.

Summers said the US economy, however, is still in a state of “heating,” as evidenced by the July employment and wage numbers released on Friday. A “overheating” labor market would mean “steady or even accelerating inflation,” he said.

Labor Department data on Friday showed payrolls jumped by 528,000 in July, a broad advance that exceeded all estimates and was the largest in five months.

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“Everything in that number indicates overheating, which is not yet under control, and I am not on the path to control yet,” said Summers, a Harvard professor and a paid contributor to Bloomberg Television. “My anxiety has already been amplified,” he said.

Summers highlighted that his onetime intellectual sparring partner in economics, Nobel Prize winner Paul Krugman, also warned that it was not time for the Fed to change course. Federal policymakers have raised interest rates by 75 basis points in each of the past two meetings, the most aggressive tightening since the 1980s.

Krugman previously wrote in the New York Times that “the good news we’re about to get about short-term inflation is not evidence that the strategy has actually worked, and unfortunately (I’m usually a financial pigeon), it doesn’t provide a justification for heading toward easier money.” “.

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The danger, Summers said, is that “we will face a situation as in the 1970s, where we perpetuated inflation by not doing enough to contain it.”

Excluding foodstuffs and commodities like energy, Summers said, “we have by every reasonable measure of core inflation going somewhere plus or minus 5%.” “This is more than it was when Richard Nixon put price controls in place. This is not acceptable in any respect.”

The former Treasury chief reiterated his criticism of Federal Reserve Chairman Jerome Powell’s assessment last month that with the latest rate hike, the central bank has already reached a “neutral” position – not fueling or limiting consumer prices.

“I don’t think the Fed has the lead right now,” Summers said. Without a significant increase in real interest rates – which are adjusted for a certain measure of inflation – he said, “we are setting the stage for stagflation.”