Summers Warns U.S. Risks Rising Inflation Amid Massive Stimulus
(Bloomberg) -- Former Treasury Secretary Lawrence Summers reiterated his warning that the U.S. risks rising inflation amid massive government stimulus, easy monetary policy and an expected surge in consumer spending as the Covid-19 pandemic recedes.
“The idea that it can’t ratchet up quickly is just plain wrong,” Summers told David Westin on Bloomberg Television’s “Wall Street Week” on Friday.
The debate over the path of inflation has been intensifying among economists, lawmakers and Wall Street -- especially with the Biden administration’s $1.9 trillion stimulus package signed into law earlier this month.
Many officials expect a rise in prices this year as more businesses reopen, vaccines are distributed and consumers rush to spend after more than a year of pandemic-era restrictions. But Federal Reserve Chair Jerome Powell has repeatedly said in recent weeks that he doesn’t expect those increases to be persistent.
“We have been living in a world of strong disinflationary pressures -- around the world really -- for a quarter of a century,” Powell told the House Financial Services Committee on Tuesday. “We don’t think a one-time surge in spending leading to temporary price increases would disrupt that.”
Summers, who is a paid contributor to Bloomberg, noted the Fed chief’s stance in Friday’s interview.
“If you were looking to un-anchor inflation expectations, having the Fed chair say the Fed’s going to have a new regime and is no longer sure that overheating the economy leads to inflation, and having the administration say we’re in an entirely new progressive era where policy is going to differ radically from what it has been for the last 40 years -- those would seem like the best things you could do if you were trying to un-anchor expectations,” he said.
Bond yields have climbed in recent weeks on mounting expectations of stronger economic growth and faster inflation after the pandemic ends.
In addition, inflation metrics in coming months will be temporarily impacted by so-called “base effects.” Due to the very weak inflation prints seen at the start of the public-health crisis, year-over-year increases in the price metrics will appear large.
Cecilia Rouse, chair of the White House Council of Economic Advisers, addressed concerns over government spending and the economy in an interview with CNN earlier Friday.
“We see that there is potential risk for inflation, but the risk of doing too little, in terms of generating economic scarring, having families that can’t put food on the table, the impacts for children,” she said, “was far greater.”
President Joe Biden on Wednesday is expected to present his longer-term economic program, dubbed Build Back Better, spanning infrastructure and technology investments to a revamp of the tax code to help address widening income inequality.
Summers said he supports a level playing field for taxation and raising more revenue through measures including closing tax loopholes, working with other countries to prevent tax arbitrage and instituting a corporate minimum tax.
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