Summers Warns Fed on 1970s-Style Mistake With CPI Set to Slow

Former Treasury Secretary Lawrence Summers said he is concerned that a slowdown in inflation in the coming data will lead the Federal Reserve to conclude that its policies are working when, in fact, much more action is needed.

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(Bloomberg) – Former Treasury Secretary Lawrence Summers said he is concerned that a slowdown in inflation in the coming numbers will prompt the Federal Reserve to conclude that its policies are working when, in fact, much more action is needed.

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“I’m afraid we’ll see some good news on non-core inflation,” Summers said on Bloomberg Television’s “Wall Street Week” with David Westin, ahead of consumer price data expected Wednesday that will show a slowdown in inflation, especially thanks to a decrease in gasoline costs. Combined with some signs of an economic slowdown, there is a danger that this “will lead the Fed to think things are under control”.

However, the U.S. economy remains in an “overheated” state, as evidenced by July’s employment and wage data released Friday, Summers said. A “red-hot” labor market means “constant or even accelerating inflation,” he said.

Payrolls rose 528,000 in July, a broad advance that surpassed all estimates and was the largest in five months, Labor Department data showed Friday.

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“Everything in this number tells me you’re overheating, not yet under control, not on your way to being under control,” said Summers, a Harvard University professor and paid contributor to Bloomberg TV. “My concern was actually magnified,” he said.

Summers emphasized that his sometimes intellectual sparring partner on economics, Nobel laureate Paul Krugman, also warned that it is not time for the Fed to change course. Fed policymakers have raised rates by 75 basis points each in the past two meetings, the most aggressive tightening since the 1980s.

Krugman previously wrote in the New York Times that “the good news we are about to get about short-term inflation is not proof that the strategy has already worked, and unfortunately (I’m usually a monetary dove), it offers no justification.” for a pivot toward easier money.”

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Summers said the danger is that “we’re going to get into a situation like the 1970s, where we kept inflation going by not doing enough to contain it.”

By cutting out food and commodities like energy, “with any reasonable degree of core inflation, we’ve got plus-or-minus 5% somewhere,” Summers said. “That’s more than when Richard Nixon introduced price controls. That is in no way acceptable.”

The former Treasury chief reiterated his criticism of Fed Chair Jerome Powell’s assessment last month that the central bank had already reached a “neutral” setting with the latest rate hike — where it does not stoke or restrict consumer prices.

“I don’t think the Fed has the wire right now,” Summers said. Without a significant increase in real interest rates — which are adjusted for some degree of inflation — “we’re just setting the stage for stagflation,” he said.

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