An economic downturn is necessary to bring inflation to the Fed’s 2% goal, Larry Summers said. The former US Treasury Secretary said the Fed was “behind the curve” on fighting inflation. Summers remains hopeful about the US economy relative to others despite murky macro conditions. Loading Something is loading.
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Former US Treasury Secretary Larry Summers doesn’t see inflation coming down to the Fed’s target soon without a substantial economic downturn.
He said fiscal stimulus flooding into the economy during the COVID-19 pandemic and a lengthy period of ultra-low interest rates turned the US from a “2% inflation country to a 5% inflation country,” he said at the Morningstar Investment Conference on Wednesday.
It was “obvious that the bathtub was going to overflow,” Summers said, referring to stubbornly high inflation. “I think we’re going to have difficulty getting near a 2% inflation target until and unless the economy slows down substantially.”
Consumer inflation has cooled of sharply after hitting 9% in June, but March’s 5% rate remained well about the Fed’s goal.
Summers said the central bank was “behind the curve” on fighting inflation and the right thing for the Federal Reserve to do at next week’s meeting is to hike rates by 25 basis points.
Despite murky macro conditions from the Fed’s tightening and turmoil in the banking sector, Summers remains hopeful about the US economy in comparison to others in the world.
“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,” he added. “I would rather be playing America’s hand than be playing the hand of any other major country in the world.”