Former Treasury Secretary Lawrence Summers said that Federal Reserve policymakers seemed to settle on an inconsistent set of actions this week based on internal dynamics at the US central bank.
(Bloomberg) — Former Treasury Secretary Lawrence Summers said that Federal Reserve policymakers seemed to settle on an inconsistent set of actions this week based on internal dynamics at the US central bank.
“I found the Fed’s action a little bit confusing,” Summers said in an interview with Bloomberg Television’s “Wall Street Week” with David Westin. While there were arguments for not raising interest rates on Wednesday, those wouldn’t be consistent with adding two rate hikes to the outlook for the rest of the year and boosting the forecast for growth — as the Fed did — he said.
Fed Chair Jerome Powell and his colleagues this week bumped their median estimate for the benchmark rate by half a percentage point for year-end, to 5.6%, while keeping their current policy setting unchanged. Powell said that the Fed would benefit from more data to gauge the cumulative impact of past tightening.
Wednesday’s policy decision was unanimous, despite some officials having signaled that they favored considering an increase at the June meeting. Some Fed watchers reckoned that hawks on the panel would have been more comfortable sitting tight given the penciling in of more hikes by year-end.
“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,” said Summers, a Harvard University professor and paid contributor to Bloomberg TV. “And that was a bit disturbing.”
For his part, Summers said “the Fed has probably got to maintain a posture of moving towards restraint” with policy, given evidence of US economic strength:
- The consumer “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” suggest “substantial” strength.
Meantime, there’s not yet clear evidence of a slowdown in inflation coming, he said.
“I don’t think it’s very serious what the precise timing is” with regard to raising rates further, he also said. After keeping on hold this week, if policymakers “end up lifting rates 50 basis points at the next two meetings, that’s going to be OK.”
As for the European Central Bank, which raised its key interest rate by a quarter percentage point Thursday, Summers said it will “very likely need to continue acting.”
“They haven’t moved nearly as far as we have, in the face of somewhat greater threats,” Summers said. “The inflation issue is probably a more severe one” than in the US, he said.
Turning to China, the former Treasury chief reiterated his view that policymakers there are confronted by “a very difficult set of challenges,” amid a shrinking population and pressures for the flight of capital. Nearer term, China’s challenges are enough to be damping global commodity prices, he noted.
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