Summers Says Policy Makers May Have Now Cemented Inflation at 4%

(Bloomberg) -- Former Treasury Secretary Lawrence Summers said that U.S. policy makers, by allowing the economy to overheat, have likely cemented inflation rates of 4% or higher, way beyond their long-term target.

“We’ve put in motion, for the first time in 40 years, excessive inflation caused by overheating of the economy,” Summers said on Bloomberg Television’s “Wall Street Week” with David Westin. “We’re going to entrench inflation way above 2% -- perhaps in the 4% or even higher range.”

The Harvard University professor said Friday’s November consumer price index data showcased that high inflation isn’t at all “transitory,” as the Federal Reserve and the Biden administration had said for much of the year. The release showed inflation hit a 39-year high of 6.8% on an annual basis last month.

“This isn’t just going to go away of its own accord,” said Summers, a paid contributor to Bloomberg. “The Fed’s going to have to take substantial action to control inflation unless there’s some kind of other adverse development -- a crack in markets or something of that kind.”

He also said the Fed will need to execute more than just two or three interest-rate increases next year. Futures trading now suggests about three quarter-percentage-point hikes, and economists’ forecasts have increasingly aligned with that outlook -- JPMorgan Chase & Co. on Friday adjusted its call to three moves in 2022. 

Summers indicated that the need for action is made greater by the Fed having loosened monetary policies even as inflation climbed along with job vacancies. Inflation-adjusted interest rates are lower, the Fed’s balance sheet is bigger and measures of financial conditions are easier, he noted.

“It’s going to take multiple years certainly to work it out,” Steve Rattner, who served in the Obama administration during the financial crisis, said on the same program, referring to high inflation. “It is going to be painful. And it’s going to be painful for growth, it’s going to be painful for jobs.” 

Stocks may also be hit, said Rattner, the chairman and chief executive officer of Willett Advisors LLC, which invests Michael Bloomberg’s personal and philanthropic assets. Bloomberg is the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News.

“I’m not sure the market’s ready for three interest-rate increases next year, and I think that may come as a shock to them,” Rattner said.

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