Larry Summers accuses the Federal Reserve of “dangerous self-indulgence” in the face of inflation

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Lawrence Summers, a former U.S. Treasury Secretary, has strongly criticized the Federal Reserve for its weak monetary policies, accusing the central bank of creating “dangerous complacency” in financial markets and misinterpreting the economy.

Summers’ comments at a conference hosted by the Federal Reserve Bank of Atlanta marked a significant escalation of his attacks on the US central bank. Harvard University economist and former Democratic presidential adviser had already criticized Joe Biden fiscal stimulus as overly excessive earlier this year.

Summers said monetary and fiscal policymakers had “underestimated the risks, very substantially, for both financial stability and conventional ones. inflation of extremely low prolonged interest rates ”.

The Fed has promised to keep US interest rates on hold until zero until the recovery reaches certain milestones, including full employment, predicting that inflation rises will be transient. The latest average forecasts of central bank officials show that fund rates remain in place until at least 2024.

“Political projections that suggest that rates cannot be increased. . . almost three years are creating a dangerous complacency, “Summers said, adding that the Fed could be forced to tighten monetary policy in a great way that would scare markets and even hurt the real economy.

“When, as I think is very likely, there is a strong need to adjust policy, those adjustments will come as a surprise.” This “shock” would do “real damage to financial stability and can cause real damage to the economy,” Summers warned.

He Powered has argued that strong monetary support is still needed for the economy due to the risk of a slowdown in recovery and unemployment compared to pre-pandemic levels. Nor does he expect the current rise in consumer prices to last, arguing that it is being fueled by bottlenecks in the supply chain and economic reopening.

Summers warned that the notion of an equal balance between inflationary and deflationary risks, and between financial bubbles and credit problems, was “very far from an accurate reading of the economy at this time.”

“The main current risks are overheating, asset price inflation and the consequent excessive financial leverage and subsequent financial instability. Not a recession in the economy, excessive unemployment and excessive slowness, ”Summers said.

“It cannot be asserted today in the contemporary American economy that the slowdown in the labor market is a dominant problem,” he added. “Walk outside: labor shortage it is a widespread phenomenon. ”

Summers ’attacks on U.S. economic policymakers this year have been particularly exacerbated because she is a Democrat and have provoked her much criticized within the party. Liberal activists in particular say he is out of touch with the struggles of middle- and low-income households.

Summers, who served as Secretary of the Treasury from 1999 to 2001, is said to represent the market-friendly wing and fight against the deficit of the democratic economic establishment that supported excessively tight fiscal policies during the Bill Clinton administrations and Barack Obama, who led the middle class to stagnation and revolt against globalization.

None of this has deterred Summers from taking a very public stance. On Tuesday, he said the Fed’s new policy framework, approved in August last year to be more tolerant of inflation after lessons from the financial crisis, was not appropriate for the current environment.

“It’s not a reasonable place for politics to be in a world where the budget deficit has widened by 15% thanks to a stimulating policy,” Summers said. “I’d rather see us go back to a Fed concerned about avoiding inflation, rather than a Fed [that] he is concerned about preventing the fear of worrying about inflation. ”

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