Summers Sees Fed in a ‘Different Place’ on Inflation Than Before

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Former U.S. Treasury Secretary Lawrence Summers said the Federal Reserve this week acknowledged the threat of an inflation outbreak is greater than it previously thought.

“The Fed signaled that it recognized that we were in a different place than it expected,” Summers told Bloomberg Television’s “Wall Street Week” with David Westin. “That was an appropriate change, given the inflation reality.”

Summers Sees Fed in a ‘Different Place’ on Inflation Than Before

Fed officials on Wednesday accelerated their expected pace of monetary-policy tightening, with a majority projecting two interest-rate hikes in 2023. They also raised their inflation estimates for the next three years, and Chair Jerome Powell said they have started to discuss when and how to pare their bond-buying program.

Summers Sees Fed in a ‘Different Place’ on Inflation Than Before

The meeting marked “the beginning of the Fed’s recognition that overheating is the issue that it has to deal with going forward,” said Summers, a professor at Harvard University and a paid contributor to Bloomberg.

The calm reaction of equities and a decline in the 10-year Treasury yield after the decision possibly reflected new confidence among investors that the central bank is less likely to make a policy mistake by allowing the economy to get too hot, and having to quickly tighten its monetary stance, he added.

“An optimistic view would be, because they signaled that they were on the case, that was reassuring to everybody that the accident people feared was less likely to happen,” Summers said. “An optimistic view of those developments would be in fact, by changing expectations and changing their signals, that’s policy in the monetary sphere and they were rewarded for it.”

As for when the Fed might start to withdraw stimulus, Summers said, “my guess is that the adjustments are going to come on the sooner side of the distribution of expectations.”

“Most market observers think the Fed went further than they expected,” he said. “When a central bank tightens more than is expected and financial markets are more calm than is expected and long rates fall, that’s really a sign they were doing an appropriate thing.”

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