Summers Says Fed Still ‘Transitory’ on Inflation, Under Surface

(Bloomberg) -- Former Treasury Secretary Lawrence Summers said the Federal Reserve’s pivot this week toward addressing elevated inflation more quickly is insufficient, and that policy makers are acting like they still believe that price gains will slow substantially on their own.

“If you look under the surface, they’re still kind of betting that inflation is heavily transitory,” Summers said on Bloomberg Television’s “Wall Street Week” with David Westin. “Because they’re not really applying restraint to the economy of a magnitude that would be expected to diminish inflation in a very substantial way.”

Summers pointed to forecasts from Fed officials released Wednesday showing the expectation for the unemployment rate to drop to 3.5% with inflation tumbling from multi-decade highs toward the central bank’s 2% target. At the same time, the projections showed policy makers don’t anticipate raising their key interest rate even as high as their long-run estimate of 2.5% for the benchmark.

In their policy statement, Fed officials this week dropped a reference to elevated inflation rates “largely reflecting factors that are expected to be transitory.” 

Summers reiterated his own expectation for surging home rental costs to put pressure on inflation into 2022. He also cited a “red-hot labor market” along with prospects for new bottlenecks in supply chains as contributors to price strains.

‘Concept’ Remains

“I am concerned that we’ve hidden the word ‘transitory’ but we haven’t hidden the concept that inflation is going to solve itself, said Summers, a paid contributor to Bloomberg and a Harvard University professor.

Still, it could be that Wednesday’s shift is part of a step-change by the Fed with further stages coming, the former Treasury chief said.

“There’s a case for making adjustments gradually, and it may be that this is the first stage in what will be several adjustments” in the Fed’s outlook and policy plans, Summers said. With financial markets not even pricing in the amount of policy tightening that the Fed now anticipates, “it’s a complicated situation,” he said.

As for the stalling of President Joe Biden’s signature tax-and-spending plan in Congress this week, Summers said he’s hopeful that an improved version will result in the end. It would be “very, very unfortunate and would set our economy back” if a package that includes expanded child tax credits, green investments, pre-kindergarten education and child-care assistance isn’t enacted, he said. 

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