Summers: ‘The Fed Doesn’t Know Where It Is’ and Isn’t ‘Willing to Be Realistic’

During an interview aired on Friday’s edition of Bloomberg’s “Wall Street Week,” Harvard Professor, economist, Director of the National Economic Council under President Barack Obama, and Treasury Secretary under President Bill Clinton Larry Summers reacted to recent minutes from the Federal Reserve by stating that “the Fed doesn’t know where it is” and the Fed is “not yet willing to be realistic” about the fact that it’s “exceedingly unlikely that inflation can be brought down to target levels without a substantial increase in unemployment.”

Summers said the minutes “confirmed what I suspected, which was that the Fed doesn’t know where it is, that the world is very ambiguous at this point, and minutes of a meeting are a very poor way to convey a collective message. Look, the Fed has a fundamental problem, about which it is not yet willing to be realistic. And that is, that it is exceedingly unlikely that inflation can be brought down to target levels without a substantial increase in unemployment. They want to be very concerned about unemployment and about inflation. And the reality is that it’s probably not so realistic to think that they’re going to get inflation all the way down without getting unemployment up. And they don’t want to acknowledge that, and that forces a certain confusion into all of their statements. I can sympathize and understand why they don’t want to acknowledge that. Part of the problem is they’ve taken on an excessive obligation to communicate. So, I think they’re in a very, very difficult situation. I don’t know to what extent they’re going to choose to take the pain that is ahead on the stag side and to what extent they’re going to choose to take it on the flation side. That remains to be seen. I suspect, in some ultimate sense, they don’t really know either, which way it’s going to go. It’s got to worry them that financial conditions are now materially looser than they were when the Fed last met. And when, in the middle of a tightening cycle, financial conditions are substantially loosening, that has to make a central bank nervous.”

He continued, “David, there’s one other aspect to the situation that I think is very important and underrecognized. And that is because everybody focuses, and focuses rightly on the geopolitics, what’s happening with Russia and Ukraine, what’s happening with droughts, all of it, they don’t really fully internalize that oil prices and wheat prices have both come down substantially and are predicted to come down substantially in the future. That’s what’s driving the relatively limited inflation expectations. And those who were quick to focus on concepts of core inflation when headline inflation was higher than core inflation can’t stop doing that when headline inflation is lower than core inflation. And I don’t see that we’re really making any great progress with respect to core inflation. I don’t see it with respect to the wage numbers. I don’t see it with respect to the median or trimmed mean measures. And so, I think we’ve still got a substantial inflation challenge ahead of us.”

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