Former Treasury Secretary Larry Summers, a Democrat, is warning that the Federal Reserve’s easy-money strategy could backfire as inflation concerns grow.
Summers, who served as treasury secretary under Clinton and director of the National Economic Council under Obama, has emerged as one of the top critics of the recent fiscal and monetary policies of the Biden administration and the Fed. He launched a Tuesday broadside against the Fed’s predictions that it will keep interest rates near-zero during a conference hosted by the Federal Reserve Bank of Atlanta.
“Policy projections suggesting that rates may not be raised for … close to three years are creating a dangerous complacency,” Summers warned. He also cautioned that if the central bank decided to suddenly tighten its monetary policies, that “jolt” could cause fear that could inflict “real damage” to the economy, according to the Financial Times.
“When, as I think is quite likely, there is a strong need to adjust policy, those adjustments will come as a surprise,” the Harvard University economist said.
PIZZA DELIVERY COMPANY BRINGS SHARP TASTE OF LABOR SHORTAGES AND ECONOMIC SQUEEZE
Summers also spoke about labor shortages that some economists say the United States is facing. He told those at the conference, “Walk outside: Labor shortage is the pervasive phenomenon.”
“The primary risks today involve overheating, asset price inflation, and subsequent financial excessive leverage and subsequent financial instability. Not a downturn in the economy, excessive unemployment, and excessive sluggishness,” Summers said. “It is not tenable to assert today in the contemporary American economy that labor market slack is a dominant problem.”
April’s jobs report was a major disappointment, with the economy adding just 266,000 jobs — far short of forecasters’ predictions of nearly 1 million jobs. The unemployment rate also rose slightly to 6.1%, according to the Bureau of Labor Statistics.
The warnings come as President Joe Biden’s administration pumps money into the economy as part of an aggressive fiscal policy designed to help pull the country out of its pandemic-induced recession. Some economists have feared that the spending, coupled with the Fed’s ultra-low rates, could cause too-high inflation.
The Fed is targeting sustained 2% inflation and full employment. While it predicts that inflation will breach the 2% mark this year, it believes that it will sink back down in 2022.
Consumer prices increased by 4.2% for the year ending in April, with the costs of goods rising across the board, the Department of Labor announced last week.
CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER
The rise was the most intense since 2008 and shattered the expectations of economists who predicted only a 3.6% increase.
