Fed chief Powell ‘did what he had to do’ in Jackson Hole, says Larry Summers

“The Fed is positioned as well as it can be — given the credibility lapses and the mistakes that have been made — with these remarks to manage things going forward.”


— Larry Summers

Former US Treasury Secretary Lawrence Summers praised the Federal Reserve on Friday, saying Fed chief Jerome Powell’s latest pledge to contain inflation was a “statement of resolve”.

I see: Fed’s Powell Says Lower Inflation Will Hurt Households, Businesses In Jackson Hole Speech

Shortly after Powell spoke at the central bank’s annual symposium in Jackson Hole, Wyo., Summers told Bloomberg that the Fed chairman had done “what he had to do” and that it was clear the Fed’s “overwhelming priority” was to pulls inflation back from its fastest pace in four decades.

In a brief six-page speech, Powell noted that the Fed is likely to continue raising interest rates and leave them high for a while to stamp out inflation. He said getting the annual inflation rate back to the 2% target is “the main focus of the central bank right now”, even though consumers and businesses will feel financial pain.

Summers, a former chief economist at the World Bank, former director of the National Treasury and former US Treasury secretary, as well as a former president of Harvard University, has repeatedly criticized the Fed for failing to spot the recent rise in inflation and then acting too too late to deal with it.

For example, earlier this week Summers said the Federal Reserve is causing “confusion” among investors by avoiding a clear statement that unemployment is likely to rise in the fight against inflation, according to the New York Post.

From the archives (June 2022): Here’s why Larry Summers wants 10 million people to lose their jobs

“The reality is that it’s probably not that realistic to think that the Fed can ‘bring down inflation completely without unemployment – and they don’t want to admit that,'” Summers said a week ago. “This causes a certain confusion in all their statements.”

The U.S. unemployment rate was just 3.5 percent through July, according to the latest jobs report. For now, the Fed projects that unemployment will reach just 4.1% by 2024, even as it implements a series of sharp interest rate hikes that will weigh on the finances of American businesses.

Summers argued that unemployment would need to rise to at least 5% to successfully tackle inflation and pointed out that US stock and bond markets have rallied in recent weeks in a sign that investors were yet to see the Fed’s attempt to cool the economy through tighter monetary policy that limits economic growth.

US markets got the message on Friday when stocks tumbled, with the Dow Jones Industrial Average DJIA,
-3.03%
closing more than 1,000 points for the worst one-day percentage drop since May, centered on Powell’s pledge that the central bank will continue its fight against inflation until the job is done – bringing the annual increase in the US cost of living back to 2 of % target — “done”.

I see: ‘No Fed pivot’: Wall Street finally gets the message as stocks fall after Powell’s speech

After Powell’s speech in Jackson Hole, Summers praised Powell’s admission that there would be a price for cooling inflation, noting that short-term hits to employment and wages were acceptable to ensure long-term prosperity.

Powell had “prioritized inflation, making it clear that he recognized that this prioritization would have short-term adverse consequences that would not be easy,” Summers said, adding that the central bank was now as well placed as it could be given the mistakes . committed, in his view, in the recent past.

See also: Inflation falls for first time in more than two years, key U.S. gauges show, as gas prices fall

The former finance minister said European Central Bank President Christine Lagarde has a “much more difficult job” than Powell, given euro zone inflation, energy price shocks and regional political problems.

“It’s going to be a very difficult road for them to walk in Europe,” Summers said. “My suspicion would be that they would have to raise rates more than they currently are, but that would be at a time when there are very significant recessionary forces.”

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