The former Treasury secretary said he is ‘not that optimistic’ about the fight against rising prices and that the Federal Reserve lost credibility by acting too slowly.
Former Treasury Secretary Lawrence Summers said taming inflation will likely lead to a “meaningful” economic downturn.
Speaking at the Morningstar Investment Conference in Chicago, he said that fiscal stimulus and low interest rates during the pandemic turned the US from a “2% inflation country to a 5% inflation country.”
“I think we’re going to have difficulty getting near a 2% inflation target until and unless the economy slows down substantially,” he said.
Summers, a Harvard University professor and paid contributor to Bloomberg Television, said earlier this month that the likelihood of a US recession is increasing and that the Federal Reserve is nearing the end of its interest-rate hikes.
The latest inflation reading for March showed prices rose 5% from a year earlier.
Other takeaways from the talk included:
- Summers said the right thing for the Fed to do at next week’s policy meeting is to raise rates by 25 basis points. He reiterated his view that the Fed has lost credibility because they were “behind the curve” on fighting inflation.
- Regarding the recent banking crisis, he said that the fallout is leading to a “constriction of credit” that is doing some of the work of the Fed’s rate hikes. “We don’t need as much interest-rate increases as we would if the banking system were working smoothly,” he said.
- Summers said the Federal Reserve has a tendency “to groupthink” especially around macroeconomic models.
- He’s still optimistic about the US economy relative to the rest of the world: “I would rather be playing America’s hand than be playing the hand of any other major country in the world,” he said. “If you look at the collective value of all the American companies relative to all the non-American companies, that is at its highest level ever.”
- Regarding the fiscal cliff, Summers said that the odds of a government default are “under 2%.”
- He thinks remote work is here to stay and that it will lead to reduced demand for commercial real estate, but that the sector is only a portion of the vast US economy. He personally is a fan of the hybrid model. “We don’t run the economy to maximize output, we run the economy to make good lives for our people. The fact that people like it better counts.”
- In a rapid fire game of “long or short,” Summers said he is long blockchain and short Bitcoin. When asked about Fed chair Jerome Powell, he said “hold.”