With the U.S. consumer price index due next week, former U.S. Treasury Secretary Lawrence Summers worries that if the Fed shows signs of slowing due to the latest CPI, it will conclude that policy is working , fearing a repeat of the stagnant inflation of the 1970s.
“I’m worried we’re going to get some good news on non-core inflation, coupled with some signs of a slowdown, that would make the Fed think things are under control,” Summers said.
He sees this as the most dangerous point, as it would expose the US economy to a situation similar to the 1970s, where not enough was done to contain inflation, making it a chronic problem.
Summers pointed out that the U.S. economy is still in an overheated state, which can be seen from yesterday’s non-farm payrolls and wages data, and the red-hot labor market means that inflation is likely to continue, or even accelerate.
Nonfarm payrolls rose by 528,000 in July, data from the U.S. Labor Department showed on Friday, far better than market expectations and the largest increase in five months, while wage growth also beat expectations.
“To me, these numbers represent that everything is overheated and not under control,” Summers said, reiterating a warning from Nobel laureate Paul Krugman that it is not the time for the Fed to change policy direction.
In addition, Summers again criticized Fed Chairman Jerome Powell for his assertion that “interest rates are close to neutral” after last week’s meeting, saying that if real interest rates are not raised significantly, they are only preparing for stagnant inflation .