Barron's did a Q&A with Larry Summers, the economist, former Treasury Secretary and former Harvard President. It's a must-read if you're interested in our current economic situation. He has been calling our inflation problem since the beginning.
A few highlights:
- My judgment isn’t about the competence of the Fed. It’s a judgment about the difficulty of the task. The discouraging fact is that, when you have unemployment below 4% and inflation above 4%, recession always follows within two years.
- Monetary policy famously has worked with a lag of nine to 18 months. One of the reasons I worry about the Fed’s prospects for generating the soft landing we all want is that I like to compare the Fed’s problem to the challenge of adjusting the shower in an old hotel, where there’s a lag of 20 or 30 seconds between the time you turn the faucet and the time the water temperature changes. It’s very difficult to avoid either scalding yourself or freezing yourself. You turn, and nothing much happens, and so you turn more, and then, all of a sudden, you’re jumping out of the shower. That’s the kind of problem that the Fed has.
- The Fed should return to a much more modest framework around the objectives of price stability and full employment in the face of changing data. It should resist the broad idea of forward guidance, which I think is one of those elegant academic ideas that doesn’t work very well in practice because central banks don’t and can’t know what they’re going to do in the future. And so forward guidance is, the vast majority of the time, folly.
- I understand the decision to do a 0.75-percentage-point move as a significant policy step. But I still don’t believe that the Fed has realistic projections. In March, I said that the dot plot, which charts members’ individual rate forecasts, wasn’t remotely realistic. While [the dots] were significantly adjusted this time around, unfortunately I still don’t think they are realistic. Why should anyone think that inflation is going to come down from the 8% range to the 2% range without unemployment rising above the Fed’s estimate of its normal rate, an estimate that is itself too low? My guess is that you will see further increases in projected inflation, projected unemployment, and projected interest rates.
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