Summers Warns Fed of 1970s-Style Mistake With Slow CPI

Former Treasury Secretary Lawrence Summers said he is concerned that a slowdown in headline inflation in the next few data will lead the Federal Reserve to conclude its policies are working, when in fact much more action is needed.

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(Bloomberg) — Former Treasury Secretary Lawrence Summers said he worries that a slowdown in headline inflation in upcoming data will lead the Federal Reserve to conclude its policies are working, when in fact much more action is needed.

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“I am concerned that we are going to see some good news on non-core inflation,” Summers said on Bloomberg Television’s “Wall Street Week” with David Westin, ahead of consumer price data due out on Wednesday that will show a decline in inflation, thanks especially to a drop in gasoline costs. Combined with some signs of an economic slowdown, the danger is that “it’s going to lead the Fed to think things are under control.”

However, the US economy remains in an “overheated” state, as evidenced by July employment and wage figures released Friday, Summers said. A “red-hot” job market will mean “constant or even accelerating inflation,” she said.

Payrolls rose by 528,000 in July, a vast gain that beat all estimates and was the biggest in five months, data from the Labor Department showed on Friday.

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“Everything in this issue tells me overheating, not under control yet, not on track to be under control yet,” said Summers, a Harvard University professor and paid contributor to Bloomberg TV. “My concern was actually magnified,” he said.

Summers noted that his former economics intellectual debate partner, Nobel laureate Paul Krugman, also warned that it is not time for the Fed to change course. Fed policymakers have raised rates by 75 basis points at each of the last two meetings, in the most aggressive tightening since the 1980s.

Krugman previously wrote in the New York Times that “the good news we are about to receive on short-term inflation is not evidence that the strategy has already worked, and unfortunately (I am usually a currency dove), offers no justification for a shift to easier money.”

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Summers said the danger is that “we’re going to have a situation like we had in the 1970s, where we perpetuate inflation by not doing enough to contain it.”

Excluding food and commodities like energy, “we have, by all reasonable measures, core inflation somewhere in the plus or minus 5% range,” Summers said. “That’s more than when Richard Nixon implemented price controls. That is not acceptable by any dimension.”

The former Treasury chief reiterated his criticism of Fed Chairman Jerome Powell’s assessment last month that, with the latest interest rate hike, the central bank had already reached a “neutral” environment, where it is not fueling or restraining consumer prices.

“I don’t think the Fed has the thread right now,” Summers said. Without significantly raising real interest rates, which are adjusted for some measure of inflation, “then we’re just setting the stage for stagflation,” he said.

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