Summers: Fed Pausing, Increasing Inflation Forecast Seems Driven by ‘Internal Political Dynamics’ — No Clear ‘Durable Reduction in Inflation’

During an interview aired on Friday’s broadcast of Bloomberg’s “Wall Street Week,” Harvard Professor, economist, Director of the National Economic Council under President Barack Obama, and Treasury Secretary under President Bill Clinton Larry Summers argued that we do not have “a durable reduction in inflation clearly established,” and the Federal Reserve’s move of pausing rate hikes while revising forecasts “towards a stronger economy and more inflation” is inconsistent and “felt like it was driven as much by the internal political dynamics of the Fed as by any consistent and coherent reading of the economic situation, and that was a bit disturbing to me.”

Summers said, “I found the Fed’s action a little bit confusing. I understand the arguments for not hiking at this meeting, but those arguments wouldn’t point towards signaling two further rate increases. They wouldn’t point towards significantly revising the forecast towards a stronger economy and more inflation. I understand the arguments for having gone the other way, but I don’t really understand the internal consistency of an approach of pausing at this meeting, but then signaling two further rate hikes down the road and signaling that they no longer expect unemployment to increase nearly as much as they used to expect it. So, this meeting felt like it was driven as much by the internal political dynamics of the Fed as by any consistent and coherent reading of the economic situation, and that was a bit disturbing to me.”

He added, “I think it’s very hard to read, but my best guess is that the consumer — which is 70% of the economy — appears to be running really quite strong at this point. We’ve got very strong employment data, much faster than population growth. The indicators on wages are a bit mixed, but the ones that seem most reliable to me, that adjust for changes in the composition of the labor force, are showing substantial strength. So, I don’t see the idea that we’ve got a durable reduction in inflation clearly established, nor do I see clear evidence of a slowing coming. So, in that context, I think the Fed has probably got to maintain a posture of moving towards restraint. … I was struck that the balancing of risks that was implicit in not moving this time was kind of inconsistent with the balancing of risks that was signaled by the two tightenings and by the forecast revisions.”

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