Harvard economist Larry Summers says the Fed should keep rates hiking

Harvard economist Larry Summers says the Fed should keep rates hiking

The Federal Reserve has been heavily criticized this year for failing to do enough to keep inflation at bay. Last week, the Bureau of Labor Statistics revealed that prices rose again in August after a brief hiatus in July.

On Friday, Harvard University economist Larry Summers revealed what he thinks the Fed should do.

Speaking on Bloomberg’s “Wall Street Week,” Summers slammed the central bank for acting too slowly on inflation, noting that its aggressive stance is relatively new. “It was only 15 months ago that the Fed was saying the rate was going to zero in the middle of 2023,” he said of the bank’s base interest rate, which is now at 2.5%.

As a result, Summer said, even more monetary tightening will be needed to flatten the inflation curve. “It will not be easy to do what is necessary,” he said. “History records many cases where policy adjustments to inflation were delayed too much and at very significant costs.”

The most striking example of those costs, Summers said, was the long period of high inflation during the 1970s.

To combat the latest round of inflation, the Fed initiated its first interest rate hike of 25 basis points in March, followed by a 50 basis point hike in May. Then, in June, it raised rates another 75 basis points, the largest increase since 1994, followed by an identical 75 basis point increase in July.

The bank’s policy-setting coalition, the Federal Open Market Committee (FOMC), did not meet in August, but will convene this week to decide on next policy.

Acting aggressively on inflation, according to Summers, is the best way to prevent economic pain from spreading widely through society. “I know of no major example where the central bank has reacted too quickly to inflation and paid a heavy price,” he said.

Summers has previously argued that it would be better to induce a recession through tight economic policy, than long-term inflation. “In terms of minimizing the risk of a stagflation catastrophe, the Fed needs to be prepared to stay the course,” he said.

All signs point to the Fed following Summers’ advice. Last month, Fed Chairman Jerome Powell said the bank needs to see significant evidence that inflation is under control before it starts lowering interest rates again.

In August, the Consumer Price Index increased by 0.1% from July, with inflation running at 8.3% year on year.

“To me they were not welcome but not completely unexpected,” Summers said of the latest monthly numbers. “I think the correct reading of the data over the years is that headline inflation varies significantly, but we have a significant inflation problem underneath.”

That underlying inflationary problem will be difficult to control, he said. “That doesn’t come without a very significant adjustment in monetary policy, and the market is waking up to that.”

This story originally appeared on Fortune.com

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