Summers: We’ve Seen Transitory Inflation Elements Fade, We’ll Need More Rate Hikes

During an interview aired on Friday’s broadcast 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 predicted that the Federal Reserve will have to hike interest rates more and that we’ve seen a decline in elements of inflation that were transitory and have declined from a rate of inflation that was never sustainable in the long term.

Summers said, “[W]e haven’t really recognized that it’s a basic feature of the inflation process, that while you get transitory fluctuations, you don’t stop an underlying wage inflation without having a significant slowdown in economic activity. And since we haven’t yet had a significant slowdown in economic activity, it shouldn’t be surprising that we’ve still got inflation well above target. Nor should anybody take comfort from the fact that the components of inflation that everybody recognized were transitory, the fact that they’ve come down, and in some cases even gone into reverse, is better than if they hadn’t, much better than if they hadn’t. But nobody ever thought we were an underlying 8% inflation country when we were having 8% inflation. So, the fact that the rate has come down shouldn’t be confused with saying that we can be confident that we’re on a path to this all being okay and certainly not with saying that we’re can be — we can be confident that we’re on a path to this all being okay without the Fed doing more to raise rates.”

He continued, “So, anything’s possible, and all of these judgments, David, are statistical. … But I think the best guess has to be that the Fed’s going to have to raise rates more, that if the Fed wants to see inflation get back to its target, it’s going to have to raise rates enough that, at some point, the economy suffers a downturn. And I’ve said it many times on your show before, but I don’t see anything that changes my mind from the view that soft landings represent the triumph of hope over experience.”

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