The Federal Reserve “got lost” last year as inflation swept American households and is still unrealistic about the impact it will have on the economy, ex-Treasury Secretary Larry Summers warned on Friday.
Summers, who was way ahead of the Fed in predicting inflation last year, stepped up his criticism of the central bank after federal data showed inflation rose to a new high of 9.1% in June.
“In 2021, our central bank pretty much let us down,” Summers told Bloomberg. “As a result, they are in a very, very difficult position, not least because they no longer have the credibility they once enjoyed given their repeatedly poor forecasting record.”
“I have to say it’s not fully resolved yet,” Summers added.
Summers said the Fed’s “dot plot,” which would return inflation to its 2% target and 4.1% unemployment by 2024, was “highly unlikely” and suggested “highly problematic groupthink” at the central bank.
Jerome Powell has promised an “unconditional” Fed fight against inflation.AP
Summers, a former top adviser to Democratic Presidents Bill Clinton and Barack Obama, has argued that higher unemployment is an inevitable consequence of policies the Fed must tighten to fight inflation – meaning millions of Americans are likely to lose their jobs will lose.
In June, the national unemployment rate was just 3.6% in what remains a historically tight labor market.
Investors are now betting that the Fed will hike rates by a full point later this month – the biggest hike in decades – as it scrambles to push prices down. The drastic action would add to fears that the central bank will be unable to “soft-land” the economy and avoid a recession.
Larry Summers forecast the alarming rise in inflation months before the Fed acknowledged it. Getty Images
Summers added that he felt the Fed lost focus over the past year, ignoring its core mission of maintaining price stability in favor of other projects that were not central to its responsibilities.
“She talked about the environment, she talked about social justice on a number of things, she confidently dismissed concerns about inflation as ephemeral, and she made mistakes in the core functioning of a central bank, including proneness to very expansionary fiscal policies than to accommodate them.” , Summers said.
After last month’s Fed meeting, Chair Jerome Powell said the bank was fully focused on fighting inflation – although he warned that more “surprises” were possible. Powell has also pointed out that the Fed’s commitment to cutting rates is now “unconditional.”
Summers criticized the Fed’s response to inflation.AP
Earlier this week, Fed Governor Christopher Waller hinted that he supports a three-quarters-point hike at the next meeting — although he didn’t rule out the possibility of a full-point hike.
Waller also described the June inflation data as “a disappointment in the major leagues”.