After the U.S. inflation report for May hit a more than 40-year high on Friday (10th), former U.S. Treasury Secretary Larry Summers said hopes of peaking inflation have been disillusioned and the Federal Reserve (Fed) Forecasting in March that inflation would fall into the 2% range by the end of the year was an illusion, and one should consider why the obvious mistakes have been made repeatedly.
“The inflation peaking theory is clearly as false as the inflation temporary theory,” Summers said. The Fed in March predicted that inflation would fall back into the 2 percent range by the end of the year, and frankly, when it was released, it was It was already a fantasy, and looking back now it’s even more absurd.”
The annual growth rate of the US consumer price index (CPI) in May did not fall as expected by the market, but climbed to 8.6%, the highest in more than 40 years, mainly due to sharp rises in gasoline, food prices and rents.
“The Fed is right now, but I don’t think they understand how hurtful the mistakes of last year (transient inflation) and the beginning of this year have been,” Summers said on Friday. “Those mistakes have robbed the Fed of its credibility.”
The Harvard professor said there will be some real harm due to the time lag between the Fed taking action and the policy taking effect. He said a few days ago that the actual U.S. inflation rate is closer to the peak level in the 1980s than expected, when Fed Chairman Paul Volcker raised interest rates by 10 percentage points to suppress inflation, leading to a deep recession in the U.S. economy.
The Fed has recently publicly communicated its intention to raise rates by 2 yards (50 basis points) each in June and July, and Fed Vice Chairman Lael Brainard also revealed last month that she doubted there was any reason for a pause in September. rate hike.
The Fed will hold its regular meeting next Wednesday and release its latest point-plot forecasts for the economy, inflation and interest rates. Recently officials have publicly communicated their intention to raise rates by 2 yards (50 basis points) each in June and July, and Fed Vice Chairman Lael Brainard recently revealed that she doubted there was any reason to pause the rate hikes in September. interest.
Regarding the rate of interest rate increases in the next few meetings, Summers believes that it is no longer a difference of 1 or 2 yards each time, and it will be more meaningful to discuss a 2-yard or 3-yard increase.
Summers called on Fed officials to think about why forecasts are so far off from actual numbers, and they’ve been wrong again and again. He believes that the problem is that forecast homogeneity is too high, and the Fed’s main economic forecast model (ie FRB-US) is not suitable for predicting inflation.
The former finance minister pointed out that the main components of the CPI report will continue to rise sharply in the coming months, such as the cost of living could rise by 8% next, while the cost of medical care still looks low.
He reiterated that it will not be easy for the Fed to achieve a “soft landing” that quells inflation without causing a recession. However, an emergency rate hike ahead of next Wednesday’s meeting would not be a wise move, and would cause panic.