Summers Says ‘Serene’ Powell Arguments Misread Inflation Risk
(Bloomberg) -- Former U.S. Treasury Secretary Lawrence Summers said Federal Reserve Chairman Jerome Powell’s Jackson Hole remarks Friday amounted to a “serene” depiction of inflation that is misreading the risks.
“He made a whole set of arguments on the serene side with respect to inflation,” Summers said on Bloomberg Television’s “Wall Street Week” with David Westin. “There’s no certainties, but I think the inflation risks are graver than those that the chairman recognized.”
Powell, in his address to the annual Jackson Hole economic symposium -- delivered virtually -- stuck to the Fed’s message that the current bout of inflation is likely to be transitory. Powell also highlighted the risk that downward pressures on inflation, of the kind observed over the last decade, could reassert themselves once the pandemic ends.
Summers -- who has been outspoken in recent months about elevated inflation risks -- by contrast saw the potential for lasting changes about the interplay between the job market and price pressures as a result of Covid-19. It’s a debate that cropped up in the Fed’s July policy meeting, where “several” officials thought the pre-pandemic state of the job market “may not be the right benchmark” to judge when the economy reaches full employment.
While Powell on Friday noted that job openings, along with the number of people quitting their jobs, are both at record highs, he maintained a “serene” interpretation of the implications, according to Summers, a paid contributor to Bloomberg and a professor at Harvard University. Summers said his own take was that this was a signal of “much more rapid wage increases” over a period of time.
With businesses rethinking their models and people rethinking their lives in light of the pandemic, there’s structural change under way, Summers said. It could mean that the U.S. can’t go back to the pre-Covid era of sub-4% unemployment and a tame rate of inflation, he indicated.
“With all that structural change, you’re likely to see some substantial increase in the level of unemployment that the economy can sustain without excessive inflation,” Summers said. “We’re kind of making a bit of a paradigm error” in terms of the read on inflation dynamics, according to Summers, who’s also a former head of the White House National Economic Council under President Barack Obama.
He also highlighted that Powell in his remarks didn’t mention housing costs, which have been rising rapidly.
Summers reiterated his view that it’s “bizarre” for the Fed to still be pumping liquidity into markets with bond buying also known as quantitative easing, producing “toxic” side effects. The central bank ought to have started moving away from QE “some time ago,” Summers said. He said he was “glad” to see Powell move toward tapering QE this fall.
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