Former Treasury chief Larry Summers said the Federal Reserve’s move this week to pause interest rate hikes while signaling future increases was “disturbing” and “confusing” — and chalked it up to internal politics at the central bank.
“I found the Fed’s action a little bit confusing,” Summers told Bloomberg News when asked his reaction to the central bank’s latest move.
“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, who now works as a Harvard University professor.
Fed Chair Jerome Powell on Wednesday sounded a cautious note as the Fed paused after hiking rates 10 straight times since early 2022 — but signaled it expects two further rate increases this year worth half a percentage point.
“The conditions that we need to see in place to get inflation down are coming into place,” Powell said. “But the process of that actually working on inflation is going to take some time,” he said, hinting that future rate hikes were in the offing.
“I understand the arguments for not hiking this at this meeting,” Summers said on Thursday, alluding to the latest numbers which show cooling inflation.
“But those arguments wouldn’t point towards signaling two further rate increases, they wouldn’t point towards significantly revising the forecasts towards a stronger economy and more inflation,” Summers said.
“I understand the arguments for having gone the other way,” Summers, who ran the treasury during the Clinton administration and who also served as an adviser to then-President Barack Obama, continued.
“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.”
The Consumer Price Index — a closely-monitored measure of inflation that tracks changes in the costs of everyday goods and services — rose 4% in May versus a year earlier, according to the US Bureau of Labor Statistics.
That was a step down from April’s 4.9% increase and marks the smallest monthly increase in more than two years. Last June, inflation had peaked at 9.1%.
Summers, who has accurately predicted the path of inflation over the last year, has sounded frequent warnings over the need to continue to aggressively hike interest rates — even at the risk of tipping the economy into a recession.
“I don’t think there’s any question that we do not yet have inflation on a secure glide path anywhere near down to the 2% level,” Summers said back in March.
“Until the Fed can be confident of that, it’s going to be tightening rather than easing.”
“My guess is that the process of bringing down inflation will bring on a recession at some stage, as it almost always has in the past,” he added.
After the Fed’s pause on Wednesday, the benchmark interest rate remained at 5.25 — a 16-year high — but the central bankers cautioned the pause may be brief — more of a “skip” — with another rate hike likely as soon as their next meeting in late July.
The rate-setting Federal Open Market Committee (FOMC) issued a unanimous policy statement at the end of its latest two-day meeting.
The committee said that “holding the target (interest rate) range steady at this meeting allows the committee to assess additional information and its implications for monetary policy.”
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