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Former Treasury Secretary Lawrence Summers said that, while the Federal Reserve hit a \u201clow point\u201d in its monetary policy history by failing to act quickly against the 2021 inflation surge, in the end it did enough to right the economy.<\/p>\n
\u201cI\u2019ve got to give the Fed credit,\u201d Summers said on Bloomberg Television\u2019s\u00a0Wall Street Week<\/em>\u00a0with David Westin on Friday. \u201cWhile it wasn\u2019t always obvious that this would be the case, they moved strongly enough and vigorously enough to keep expectations anchored\u201d for inflation, he said.<\/p>\n Summers spoke shortly after Fed Chair Jerome Powell declared that \u201cthe time has come for policy to adjust\u201d to cutting interest rates, now that consumer price increases have come down and upside risks have diminished, while dangers to employment have increased. Powell, at the annual Jackson Hole, Wyoming, economic forum, also noted that the initial call in the spring of 2021 that inflation would prove \u201ctransitory\u201d proved incorrect later that year.<\/p>\n \u201cIt was a low point in terms of monetary policy judgment,\u201d Summers, a Harvard University professor and paid contributor to Bloomberg TV, said of the Fed\u2019s actions in 2021.<\/p>\n Policymakers went on to start hiking interest rates in March 2022, and engaged in the most aggressive tightening campaign since the early 1980s. The core measure of the Fed\u2019s preferred inflation gauge, the PCE price index, which strips out food and energy costs, peaked at an annual rate of 5.6% in February 2022. In June 2024, it was 2.6%.<\/p>\n \u201cWe all make lots of mistakes \u2014 and the important thing is, when you make a mistake, to recognize it and fix it,\u201d Summers said.<\/p>\n While the former Treasury chief said it\u2019s now the \u201cright thing to do\u201d to cut rates at the Fed\u2019s September meeting, he argued that \u201cwe need to be rather more cautious about the medium term outlook for monetary policy.\u201d<\/p>\n Summers said he\u2019d be surprised if the Fed is able to \u201cbring interest rates down by nearly as much as the market is expecting over the next two years.\u201d Derivatives markets reflect expectations for policymakers to lower their benchmark to around 3% in two years\u2019 time. The current target range is 5.25% to 5.5%.<\/p>\n Referring to Fed policymakers\u2019 estimate for their benchmark over the longer run, Summers said their sub-3% expectation remains too low. With large fiscal deficits and strong investment demand for the green economy and advanced technology putting pressure on borrowing costs, the so-called neutral interest rate is likely to be higher than in the past, according to Summers.<\/p>\n \u201cI think the Fed\u2019s making a serious mistake by believing that the neutral interest rate is so low, and therefore is misjudging how restrictive any given level of policy is,\u201d he said. \u201cAnd if you don\u2019t have the right North Star, you don\u2019t navigate very accurately.\u201d<\/p>\n<\/div>\nRecommended Newsletter: <\/strong>High-level insights for high-powered executives. Subscribe to the CEO Daily newsletter for free today. Subscribe now<\/a>.<\/div>\n