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 losses and mistakes that have been made – with these remarks to handle things going forward.”


—Larry Summers

On Friday, former US Treasury Secretary Lawrence Summers praised the Federal Reserve, saying Fed Chief Jerome Powell’s latest pledge to contain inflation was a “statement of determination”.

See: Fed’s Powell says lowering inflation will hurt households and 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 that the Fed’s “overriding priority” was bringing inflation down at the fastest rate in four decades.

In a brief six-page speech, Powell signaled that the Fed is likely to keep raising interest rates and leave them high for a while to stamp out inflation. He said restoring the annual inflation rate to the 2% target is “the central bank’s overriding objective right now,” even though consumers and businesses will feel economic pain.

Summers, former chief economist of the World Bank, former director of the National Economics Council and former US Treasury Secretary, as well as former president of Harvard University, has repeatedly criticized the Fed for not having spotted the recent spike in inflation, then moved too slowly to deal with it.

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

According to records (June 2022): Here’s why Larry Summers wants 10 million people to lose their jobs

“The reality is that it’s probably not so realistic to think” that the Fed can “bring inflation down without raising unemployment — and they don’t want to acknowledge that,” Summers said a week ago. “It forces some confusion in all of their statements.”

The unemployment rate in the United States was only 3.5% until July, according to the latest employment report. Currently, 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 corporate finances. Americans.

Summers argued that unemployment will need to reach at least 5% to successfully fight inflation and pointed out that US stock and bond markets have rallied in recent weeks, a sign that investors are not yet seeing the efforts of the Fed to cool the economy. by a tighter monetary policy as a brake on economic growth.

US markets got the message on Friday when stocks fell, with the Dow Jones Industrial Average
DJIA,
-3.03%

closing down more than 1,000 points for its worst daily percentage decline since Mayemphasizing Powell’s vow that the central bank would continue its fight against inflation until the job – to bring the annual rise in the cost of living in the United States back to its target of 2% – “be done”.

See: ‘There is no pivot from the Fed’: Wall Street finally gets the message as stocks slump after Powell speech

After Powell’s speech in Jackson Hole, Summers welcomed Powell’s acknowledgment that there will be a price to pay for slowing inflation, noting that short-term hits to jobs and wages were acceptable to ensure the long-term prosperity.

Powell had “put inflation first, making it clear that he recognized that this prioritization would have short-term negative consequences that would not be easy,” Summers said, adding that the central bank was now as well positioned as possible. taking into account errors. committed, according to him, in the recent past.

See also: Inflation falls for the first time in more than two years, according to a key indicator in the United States, due to the fall in gasoline prices

The former Treasury chief said European Central Bank President Christine Lagarde had a “much tougher job” than Powell given eurozone inflation, energy price shocks and regional political issues.

“It will be a very difficult road for them to walk in Europe,” Summers said. “I suspect they’re going to have to raise rates more than what’s currently expected, but that will come at a time when there are very significant recessionary forces.”

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