The Federal Reserve “lost its way” last year as inflation gripped American households and still isn’t being realistic about the impact it will have on the economy, ex-Treasury Secretary Larry Summers warned on Friday.
Summers, who was far ahead of the Fed in predicting price surges over the last year, stepped up his criticism of the central bank after federal data showed inflation spiked to a new peak of 9.1% in June.
“In 2021, our central bank let us down quite badly,” Summers told Bloomberg. “As a consequence, they find themselves in a very, very difficult position, not least because they don’t have the credibility that they once enjoyed given their repeated poor forecasting record.”
“I have to say that it’s not something that’s been fully fixed,” Summers added.
Summers said the Fed’s “dot plot” projecting inflation would return to its 2% target and 4.1% for unemployment by 2024 was “highly implausible” and suggestive of “highly problematic groupthink” at the central bank.
Summers, a former top adviser to Democratic Presidents Bill Clinton and Barack Obama, has argued that higher unemployment is an unavoidable consequence of the policy tightening the Fed must enact to address inflation – meaning millions of Americans are likely to lose their jobs.
As of June, the national unemployment rate was just 3.6% in what remained a historically tight labor market.
Investors are now betting that the Fed will implement a massive full-point interest rate hike later this month – its largest increase in decades – as it scrambles to tamp down prices. The drastic action would exacerbate fears that the central bank won’t be able to engineer a “soft landing” for the economy and avoid a recession.
Summers added that he felt the Fed lost focus last year, ignoring its core mission of maintaining price stability in favor of other projects that weren’t central to its responsibilities.
“It was talking about the environment, it was talking about social justice in a range of things, it was confidently dismissing concerns about inflation as transitory and it made mistakes in the core function of a central bank, including leaning into highly expansive fiscal policies rather than accommodating them,” Summers said.
After last month’s Fed meeting, Chairman Jerome Powell said the bank was laser-focused on the fight against inflation – even as he warned that further “surprises” were possible. Powell has also noted the Fed’s commitment to bring down prices is now “unconditional.”
Earlier this week, Fed Governor Christopher Waller indicated he supports a three-quarter-percentage-point hike at the next meeting – though he didn’t rule out the possibility of a full-point hike.
