Summers Says Central Banks Currying Favor With Climate Focus

The world’s central banks are yielding to political pressures by emphasizing the risks of climate change when the more obvious threat to financial stability comes from future pandemics, former U.S. Treasury Secretary Lawrence Summers said Tuesday.

“Central banks have, in order to be relevant to something that’s on political leaders’ and citizenry’s mind, have rather stretched things in the degree of emphasis they place,” Summers said in a virtual question-and-answer session as part of the Federal Reserve Bank of Atlanta’s annual financial markets conference, held virtually because of the Covid-19 pandemic. Summers is a paid Bloomberg contributor.

Summers, speaking with the Atlanta Fed’s David Altig, didn’t single out the Fed for criticism, though the U.S. central bank has joined an international network of central banks in an initiative aimed at better understanding the risks posed to economies by climate change. Its focus on climate issues has been questioned by Republicans in Congress.

“The central banking community has to date been roughly 50 to 100 times more focused on issues of climate finance than of issues of pandemic finance and of readiness to deal with the next pandemic when it comes,” Summers, who was a top economic official in the Obama administration, said. “I think that’s been an error on the part of the central banking community.”

By comparison, Summers said policy makers are likely to confront a Covid-like pandemic at least once a decade in the future.

The Fed needs to acknowledge the U.S. labor market has become much tighter, with lots of employers listing jobs they are unable to fill, he said, adding he agrees with the assessment of many Republican lawmakers that generous unemployment insurance is keeping workers out of the job market.

“If the government is paying large numbers of people more to not work than they are able to earn by working, it would stand to reason that that would create a supply shock,” Summers said.

Summers in recent weeks has criticized the Fed for its ultra-easy monetary policy, under which officials have signaled interest rates will stay near zero through 2023, and he returned to this theme on Tuesday.

While saying he has “enormous respect” for Fed Chair Jerome Powell, Atlanta Fed President Raphael Bostic and other policy makers, Summers said the central bank’s move last August to set an average 2% inflation target was a mistake and too mechanical in its application. The Fed needs to be focused now on overheating of the economy as the main risk, he said.

“We have underestimated the risks, very substantially, both to financial stability, as well as to conventional inflation, of protracted, extremely-low interest rates,” he said, adding that “policy projections suggesting that rates might not be raised for close to three years are creating a dangerous complacency.”

When the time does come for the Fed to adjust policy, “those adjustments will come as a surprise and jolt to market participants in ways that will do real damage to financial stability and may do real damage to the economy,” he said.

©2021 Bloomberg L.P.

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