On Wednesday’s broadcast of CNN’s “Situation Room,” Harvard Professor, economist, Director of the National Economic Council under President Barack Obama, and Treasury Secretary under President Bill Clinton Larry Summers stated that the Federal Reserve’s decision on rate hikes was a signal of “enormous uncertainty” about the state of the banking system and that was an appropriate signal to send.
Summers said, “I think, of the difficult choices there were, this was the right choice. If the Fed had stopped raising interest rates when it clearly had had a plan to increase interest rates, I think the risk would have been that it was signaling panic and alarm. And if the Fed was that alarmed, the market and everyone else would be as well. So I think carrying through was the broadly right thing to do, that was what the market expected the Fed to do, and I think it was appropriate. I think the Fed is right to be signaling enormous uncertainty going forward. I actually think there are two possible paths: One is that there’s going to be some real durability in these banking problems and the economy’s going to turn down. The other is that this will be weathered and very much contained. And what the Fed’s going to need to do going forward is going to depend on which of those paths we end up on, which I don’t think anybody can know. I think the Fed was right to signal enormous uncertainty.”
He added, “I probably would have allowed more room for concern about inflation and left the door a bit more open to multiple rate hikes, given the strength of the recent inflation data than the Fed did in their statement, but it’s a very close call and I think what they did was entirely reasonable. A lot is going to depend upon how the regulatory authorities and the bank insurance authorities deal with the remaining bank problems out there and what happens in the banking system.”
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