Sommers Rare "Likes" Powell: Finally did it right!
Summers praises the Fed for taking action to maintain stable inflation expectations, despite its failure to respond quickly to soaring inflation in 2021. He believes that cutting interest rates is the right move, but significant rate cuts may not be possible in the next two years. Summers points out that due to fiscal deficits and the demand for investments in green economy, long-term benchmark interest rate expectations may be low
Former U.S. Treasury Secretary Summers said that although the Federal Reserve did not act promptly when inflation soared in 2021, which was a "low point" in its monetary policy history, it eventually took sufficient measures to correct the economy.
Summers said last Friday, "I must commend the Federal Reserve. Although it is not always obvious, they have taken strong enough actions and with sufficient force to maintain stable inflation expectations."
Summers made these remarks after Federal Reserve Chairman Powell announced "now is the time to adjust policy." Powell stated that with consumer prices slowing down and inflation risks diminishing, while employment risks are rising, it is now time to cut interest rates.
Powell also pointed out at the annual economic forum in Jackson Hole, Wyoming, that the initial belief in the spring of 2021 that inflation would be "transitory" was proven wrong later that year.
Speaking of the Fed's actions in 2021, the Harvard University professor said, "From the perspective of monetary policy judgment, this was a mistake."
Fed policymakers subsequently began raising interest rates in March 2022 and implemented the most aggressive tightening policy since the early 1980s. The Fed's favorite inflation gauge, the core personal consumption expenditures (PCE) price index, peaked at 5.6% in February 2022. By June 2024, the index had dropped to 2.6%.
Summers said, "We all make a lot of mistakes, but what's important is that when you make a mistake, you recognize it and correct it."
The former Treasury Secretary stated that the Fed's rate cut at the September meeting was the "right thing to do," but he believes, "We need to be more cautious about the medium-term outlook for monetary policy."
Summers said he believes the Fed will not be able to cut rates significantly as the market expects in the next two years. Derivatives markets reflect traders' expectations that the Fed will cut the benchmark rate to around 3% in the next two years. The current target range for the benchmark rate is 5.25% to 5.5%.
Summers mentioned the Fed policymakers' expectations for the long-term benchmark rate, saying that their expectation of less than 3% is still too low. Due to massive fiscal deficits and strong investment demand in green economy and advanced technology putting pressure on borrowing costs, the so-called neutral rate may be higher than in the past, Summers said:
"I think the Fed made a serious mistake in thinking the neutral rate was so low, thus misjudging the restrictiveness of any given policy level. If you don't have the right compass, you can't navigate accurately."